Each of our 50 United States are wonderful in their own, unique ways, but some offer greater financial benefits to their residents than others. Whether you’re thinking about working remotely, moving closer to your kids or grandkids, or simply getting away from winter gloom, don’t forget that there are tax advantages to claim if you move to a lower-tax state.
Here are five things to keep in mind to reap the benefits of a new ZIP code:
- Establish Domicile. From a tax perspective, domicile and residence are two separate concepts. You can own multiple residences, but you can only have one domicile—and it’s your domicile that determines where you owe taxes. Simply owning property in a state is not enough. While states’ laws on establishing domicile vary, there are two rules that generally apply. First, your domicile must be your principal and permanent place of residence. Second, you must intend to return to and remain in that residence for an indefinite period of time.
- Show Intent. How do you prove to Uncle Sam that you intend to stick around in your new home? Here are some convincing specifics:
- You’re registered to vote there
- You have a network of local professionals (doctors, dentists, accountants, etc.)
- Your driver’s license and vehicles are registered there
- Your family heirlooms and other valuables are kept there
- You’ve joined local social organizations
- You have a gym membership
3. Track Time Spent. You have to spend over half of the year (183 days) at your new home for it to qualify as your principal place of residence. Keep track of receipts, travel charges, flight and cell phone records, etc. to prove you were living in your desired domicile for the majority of the year in case your tax filing triggers a residency audit.
4. Sever Ties to Your Previous Domicile. To strengthen your case, it’s wise to minimize ties with your old home. The easiest way to do that is to sell any real estate you own there. Or, if you plan to hold onto multiple homes, try to keep a low profile there for at least a few years. The tips listed above also work in reverse: Cancel your old gym memberships, close bank accounts, sever affiliations to clubs or organizations to help make the case that you are no longer a permanent resident.
5. File Appropriately and Update Your Financial Plan. Once you’ve established your new domicile, make sure to file your federal income tax return using your new address. Depending on the state, you may also need to file a Declaration of Domicile document. And remember to keep your network of financial professionals in the loop. In particular, work with your attorney or adviser to update your estate plan to reflect new state laws.
As you can see from the above, establishing domicile in a new state isn’t easy. The IRS wants to be sure you have every intention of making this your new home. If you have any questions about your situation, please reach out to us. We are happy to help. After all, we are The Planner You Can Talk To.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.
© 2021 Adviser Investments, LLC. All Rights Reserved.