Thinking About Relocating to a Zero-Tax State?

July 5, 2019  |  

Thinking About Relocating to a Zero-Tax State?

Key Takeaways

  • Domiciling is less about paperwork and days lived in a location; it’s about how you live your life.
  • Know the five primary domiciling factors (see below).
  • Keep careful records of your move, you may need to prove it one day.

Record numbers of Baby Boomers approach retirement age each day. It’s no secret that millions of newly retired—or soon to be retired—couples are thinking seriously about relocating to states with better weather, a more relaxed pace of life, and a lower cost of living. But since the Tax Cuts and Jobs Act limited the deductions of your State, Local and Property Taxes to a total of $10,000, many folks in high tax states have considered relocating to “low or no” tax states.

If you are considering moving to Florida, Nevada, Texas, or some of the other no tax states, it’s not as simple as just buying a property and claiming that you are a resident.  High tax states such as New Jersey and New York are looking to raise revenue in any way possible, so you may have to prove you are now domiciled in your new state in order to get the tax benefits.

According to Mark S. Klein, tax attorney and partner of New York-based Hodgson Russ LLP, there are five Primary Domicile Factors:

  1. Home.
  2. Business.
  3. Time.
  4. Near and Dear.
  5. Family.

Let’s take them one at a time.

1. Home.
It will likely be assumed that your bigger, nicer residence is your actual home. If you decide to relocate to Florida, the easiest way to make this address your primary one is to sell the home in your old state. Klein, whose presentation I attended last month at the AICPA Tax Conference in Las Vegas, recommended downsizing your home in your old state, and buying a bigger house in your adopted new state.

2. Business. If you are still working and you are relocating, it’s not just what you do, but where you do it that counts.  Focus on your active business ties and consider the location of your business headquarters, your office and your assistant. The more that can be assigned to your adopted new state, the better for your residency status.

3. Time. Time is perhaps the most important factor when it comes to determining your residency. It’s not just about meeting the good old 183-day per year test. To be safe, Klein recommended sleeping two nights in your new state for every one night you sleep in your old state. Also try to spend as many weekends as possible in your new state and do so with your spouse, since most people are inclined to spend their weekends at home. Keep accurate records since auditors may be permitted to review your cell phone records to see where you have slept. Bottom line: The burden or proof is on you the taxpayer, not on the IRS.

4. Near and dear. Another test that auditors use to determine residency is where you keep your insurance riders and your most important possessions such as jewelry, art collections and your safe deposit box. Try to keep as many of these things as possible in your newly adopted state.

5. Family. Where does your spouse spend their time?  If you are caring for any minor children, where to those children live for the majority of the year and go to school?  The more time your Family spends in your new state, the stronger your residency case will be.


Real-world example
A recently retired 65-year-old couple from New Jersey—let’s call them John and Mary–are longtime homeowners who want to relocate to Florida permanently. As you’ll see shortly, John and Mary did their homework, consulted good advisors and didn’t take their relocation decision lightly:

  • They sold their full-size New Jersey home and downsized to a New Jersey condo at the beach
  • They purchased a single-family home in Florida
  • They plan to live in Florida for a least 9 months out of the year, then spend summers “vacationing” in New Jersey while living in their New Jersey beach condo. 
  • they will keep careful track of where they sleep each night through apps such as TaxBird. 
  • They will use a moving company to move personal items to Florida such as clothes, furniture and other items.  According to Klein, auditors want to see that you actually moved something, so keep careful records of the move expenses.
  • They will send an email notification to family & friends letting them know about the move (and save a copy of the email for their records) 

They will switch the following items from New Jersey to Florida:

  • Mailing address for bills
  • Homestead declaration
  • Safe deposit box
  • EZ Pass
  • Vehicle registration
  • Telephone service
  • Estate planning documents

Conclusion

Relocating is a challenging process for couples of any age and is fraught with emotional, logistical and financial decisions. Don’t let tax snafus deprive you of spending your golden years spending as much time as possible enjoying friends, family and your favorite activities, all the while saving on taxes. If you or someone close to you is considering, please don’t hesitate to contact me. I’m happy to help.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.


About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.
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