Moving? Here’s how changing states changes your income taxes

The growth of remote work and the lure of life in a lower-tax state have many people reconsidering where they make their home for tax purposes.

But changing your tax residence isn’t as simple as saying you live somewhere else. Each state has its own laws about what creates residency and understanding those rules is imperative to the success of your change in residency. If you’re not careful, your efforts could end up in complication.

To help you think about changing states for tax purposes, and how to do it, Director of Tax Services Craig Richards answers common questions about state income taxes.

How do you determine the tax benefits of moving to a different state?

Moving to another state can mean significant tax savings. The math is easy when you leave a high income-tax state such as New York or California for a state with no income tax, such as Florida, Texas or Nevada. You save whatever it is you otherwise would pay to the high-tax state. If you’re moving to a state with a lower income tax rate than where you currently live, you may be able to estimate the numbers by comparing rates, but the best approach is to consult with your tax professional to run actual figures.

What do people need to think about first before they decide to move to a new state?

The first thing to understand is that you actually need to leave your current state and land yourself in the new state. People often think if, for example, they buy a condo in Florida and change their driver’s license, that’s sufficient. But it’s not enough to simply say you’re living in another property that you own.

Your former resident state is going to look for concrete evidence that you no longer are domiciled there. You should be able to show when you moved, have made the changes that accompany a move, and are spending the necessary amount of time in the new place. Make sure you are ready to enact the life changes that validate you have a new tax residence.

How do states determine if they can tax you?

State laws differ, but generally you cannot claim residency in a state unless you have significant ties to that state. States have a definition of what domicile is by statute, which is tied to those subjective factors that determine where your one tax residence is. Many states also have a statutory rule, which creates residency when you spend more than 183 days in that state if you have a permanent place of abode in that state. That can be a home you own or place you rent. It’s important to pay attention to this if you start spending a lot of time in a state other than the one where you are currently domiciled.

What do states review when establishing your domicile?

Generally, if you get audited, there are five primary things that most states look at to determine where you are domiciled:

• Where is your home?
• Where do you keep items that are “near and dear” to you, such as valuables, heirlooms, pets?
• Where is your business or work?
• Where do you spend the majority of your time?
• Where is your family?

Secondarily, states will consider things such as where your driver’s license is issued, where you are registered to vote, where your bank statement is addressed, where your car is registered. They also will consider what address your bills are sent to, including credit card bills, utility bills, along with where your safe deposit box is located. They’ll look at where your children go to school.

These details aren’t individually vital to establishing domicile. For example, a state is not going to say “you haven’t changed your domicile because you never moved your safe deposit box.” But each of these things combine to figure into the evaluation. If you’re serious about changing your state of domicile, whether for tax reasons or otherwise, it is best to update these details to your new state to prove you have moved. The more things you can show to validate you’ve changed your residency, the better position you will be in during an audit.

How do states know where you live and spend your time?

Two of the first things that you are asked on many state tax audits are your cell phone carrier and your cell phone number. The state will create a report that shows where you have been during the audit period. If you don’t provide it, they may decide to subpoena that information.

What advice would you give to someone considering relocation to a new state?

It’s important to do sufficient planning up front and make sure that you understand what is required. Based on that, you can decide whether you’re willing to make the necessary lifestyle changes. If you’re making this decision based primarily on the tax dollars you’ll save, ask yourself, is that amount worth all the changes that are necessary to move yourself and family?

States often are aggressive in pursuing an audit to establish where you are domiciled, particularly if you have a high income. It’s important to understand that and be ready to substantiate where you are domiciled.

Working with a tax professional is worth the time to ensure you get things right. Working in advance on what you need to do and when to do it will make it easier. It will put you in a strong position if you do get audited.

What things do people often overlook when they move to a new state?

People may not think about their estate planning documents as being impacted by moving to a new state. But estate planning and tax laws vary state by state. Whenever you move, we recommend that you take the steps to update your will, living trust, power of attorney and health care proxy. Doing so shows that you have committed to your new home. It also is good practice to ensure your documents work in your new home state.