Making Cents: Moving to a state without income taxes
By: John P. Napolitano, CFP®, CPA, PFS, MST
Retirees commonly claim that they plan to leave their high tax state for a no income tax state. Now that baby boomer retirement is in full swing, there are thousands of taxpayers attempting to pull this off as I sit here and write. Unfortunately, because of the masses on the move and the recent success by some states at auditing these domicile changes, you may be inviting a state income tax audit by joining in.
Let’s set the record straight with an example. If you sell your home in MA and buy a home in Nevada (or Florida) and really move everything there, you are clearly a resident of that state and will be taxed according to that states income tax rules. The exception would be any income producing assets that still exist in your former home state of MA. This may be an active trade, business or rental real estate, where any net income would still be taxable in the jurisdiction in which it operates.
In the past, domicile changers would focus on one main issue; time. That is, how many days of the year are you in the state where you claim to be a resident? The old rule of 6 months and a day is still part of the equation these days, but not the sole factor. Furthermore, strict adherence to the time rule alone do not qualify you as a resident of the new tax free state.
There are five major categories of factors to consider. Time is one of them, and to be safe ensure that you have at least 183 days (ideally more) in the state where you plan to claim residency. Be precise with your counting, it is very easy for anyone to verify where you actually were on any given day. State tax jurisdictions have successfully subpoenaed taxpayers’ cell phone and credit card records to prove where their cases. If you lose this test, all bets are off so be precise and stay longer than the minimum amount.
The second factor is active business involvement. If you are actively running an MA based business from your deck in Lake Tahoe, NV… you’ll likely be challenged by the tax authorities regarding your other income not stemming from the business.
Next is the home itself. If you keep your family residence in the old state and buy a small condo in the new state, you’re opening yourself up to yet another challenge. The two tests with respect to the home issue are: did you actually change your residence and did you abandon the former residence?
This next one is a killer; items near and dear to you. This includes your photos, dentist, primary care doctor, artwork and prized belongings or your actual family members. If you’ve left without items that are deemed near and dear to you, like the family dog, you’re leaving yourself open to a possible issue.
Don’t take this lightly. If you try to get by with weak facts, the results of a failed audit would be back taxes, plus penalties and interest.
John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.