By Brian Ellenbecker, CFP®, EA®, CPWA®, CIMA®, CLTC®
This article is the first of a two-part series. Part 1 focuses on how to establish residency for state tax purposes. Part 2 focuses on the tax impact of changing state residency.
We are commonly asked questions surrounding how to establish tax residency in a new state. Whether buying a new primary home, purchasing a second home in a warmer climate, relocating for a new job or working remotely from a different location, there are many scenarios that might prompt this question to be asked.
For most people, determining domicile is straightforward—it’s the state in which you live in and where your primary residence is located. If you move to a new house in a new state, that new state will become your resident state and state of domicile immediately. However, for people who have multiple residences located in different states, the line gets blurrier. To make things more difficult, rules vary by state when determining domicile and tax residency.
Fortunately, there are key actions that you can take to establish legal domicile in your new state and escape taxes in the state you left.
Below is a list of some key things you can do to help document that your new state is now your primary state of domicile and resident state for tax purposes:
- Spend as much time as possible in your new state. If questioned, this is oftentimes one of the most important elements in determining your state of domicile. If you split time between two or more locations, consider keeping a log of time spent in each location. Ideally, the most time is spent at your primary residence.
- Change your mailing address. Changing your mailing address on as many items as you can is a key step. Important items include: bank accounts, investment accounts, retirement accounts, insurance policies, Social Security Administration, tax returns, credit cards, cell phones, bills and utilities, magazine subscriptions, etc. If you have a safety deposit box, consider moving its location to your new state.
- Forward mail from your old address to your new address.
- Get a driver’s license in your new state.
- Have at least one vehicle registered in your new state. At a minimum, your nicest vehicle, or the one you use most frequently, should be located here. If you have other vehicles, such as motorcycles, boats, ATVs, etc., consider registering those in your new state, if appropriate.
- Kids should attend school in your new state. For kids younger than college age, enroll them in a local school as soon as possible.
- Furniture and other property. Your nicest furniture and other property should generally be located at your primary residence. If you own valuable artwork or jewelry, move as many of those assets as possible to your new location.
- Register to vote in your new state. “Extra points” are awarded if you’re able to actually vote in person at your new location.
- Update your estate planning documents. To the extent that your current documents reference your old state, consider updating the documents to reflect your new state of residence. That may include changing the state in which the documents are signed, changing the situs of trusts, etc. It’s generally a good idea to have your estate documents reviewed whenever you move to a different state to ensure that your wishes will still be carried out in your new state.
- Integrate into your new community. Join a church, house of worship, synagogue, etc. in your new community. Switch gym memberships to a local club. Subscribe to the local newspaper. Get a library card at the local library. Join a local country club or other organizations of interest in the area.
- Find local medical providers. Establishing relationships with local providers, such as doctors, dentists, eye doctors, chiropractors, etc. is an important step.
- Don’t forget about pets. Where your pet lives is a significant factor. Make sure they receive care from a local vet. In Blatt v. the State of New York Division of Tax Appeals, the judge determined that Blatt effectively completed his change of domicile when he moved his dog.
- File a “Declaration of Domicile." Some states allow you to file a formal Declaration of Domicile. Not all states have a document like this, but if your new state does, file it. Florida, a popular destination for retirees who relocate, is one state that has this option.
Most states agree on the definition of domicile; but they don’t all agree on what factors should be used in determining domicile or what weight is applied to each factor. Taking as many steps as you can to establish a new domicile and sever the old one will help you make your case should it come into question.
Watch for Part 2: The Tax Impact of Changing State Residency in the coming weeks.