Op-ed: Are you thinking about relocating your principal residence to a tax-friendly state? Follow these steps

Wealthy taxpayers frequently relocate from high-tax states to low-tax states. According to the most recent U.S. Census Bureau data, Texas and Florida — neither of which has a state income tax — were the states with the largest population gains from 2020 to 2021. Much of that expansion has come at the expense of higher-tax states like California, New York, and Illinois.

Nowadays, wealthy families frequently own homes in more than one state, making moving more easier. However, any state that has an income tax and where an individual owns a home has a vested interest in claiming that the dwelling in their state is that person’s domicile.

In practice, having domicile in a state implies that the state can levy its own income tax on all income reported on the individual’s federal income tax return, regardless of its source. This is one of the primary reasons why many individuals consider moving.

A wave of government’s efforts to develop new ways to tax the wealthy could add to the trend of such actions. These measures range from putting a “wealth tax” on the intrinsic profits from stocks and securities to introducing special income tax bands for the wealthy and lowering inheritance tax exemptions.

But, before you contact the movers, keep in mind that state taxation, which includes state income tax as well as state estate and inheritance taxes and prospective wealth taxes, is only one issue to consider when deciding whether or not to change your domicile.

Other issues to address include asset protection rules, trust administration, trustee selection, and estate administration. Some people who relocate to a state that does not have an income tax may discover that they are paying the state in other ways, such as higher inheritance, property, and/or fuel taxes.

That is why deciding which state to call home is such an essential decision. This issue is made more difficult by the fact that states frequently have varied regulations defining what constitutes residency.

Some use “bright line” tests, such as a specific number of days in and out of the state. Others adopt a “preponderance of evidence” method, which takes into account where you vote, where you get your driver’s license, where your advisors are based, and a variety of other considerations.

Tips for redomiciling “properly”
Since I redomiciled from Minnesota to Florida and helped several of my customers do the same, I am frequently asked about “the right way” to accomplish it.

The most crucial thing is to establish that the motion is actual and not simply on paper when it is inspected. Obtaining a driver’s license or registering to vote in the new state will most certainly not suffice. States with high-income taxes, predictably, do not like losing tax money from wealthy families and will frequently audit people who claim to have redomiciled.

According to the findings, saliva samples may be stronger indications of SARS-CoV-2 persistence than nasal swabs.

When I have a client who is serious about changing domiciles, we go through a checklist of things they need to do to demonstrate that they have severed ties to their prior state of residency. The more documentation you can give to demonstrate that you are domiciled in, rather than just a resident of, your new state, the better off you will be, even if it appears to be supporting evidence. Consider the following:

Purchase or lease real estate. The first step in redomiciling should be to buy or rent a home in the new state of residence. If you are renting your home, your lease should be for at least one year.
Keep track of your travels. Make an effort to spend at least 183 days per year outside of your previous home state. Limit your excursions back to your previous residence and keep track of where you spend your time when you are not in the new state.
Change your registration and license. Get a new driver’s license and register any cars or watercraft you own in the new state. If you preserve any licenses from your previous residence, make sure they show you are a nonresident.

Sign up to vote. You must register to vote in your new state. Write to the registrar of voters at your previous address as well. Mention your change of address and request that your name be removed from voting lists.
Make a domicile declaration. In some states, such as Florida, you can and should file a declaration of domicile, in which you testify, under penalty of perjury, that your abode is in the new state.
Bank accounts and safe deposit boxes should be relocated. If all of your financial holdings are in the former state, it’s difficult to make the case for changing domiciles.

According to reports, the deposit drain from smaller banks into financial behemoths like JPMorgan Chase has slowed.

Declare an address change. Notify family, friends, business associates, professional organizations, credit card firms, brokers, insurance companies, and magazine subscription offices of your address change.
Create a new home base. Try to return to the new state when you travel. When making major purchases, do so in the new state. Keep your family artifacts, furnishings, and mementos in their new location.
Change your legal documents to reflect your new address. You must revise your will, trust, and estate paperwork after redomiciling. Make certain that none of these documents identify you as a resident of another state. Make sure your federal tax returns reflect your new address as well.

Make local connections. Participate in local charitable activities and join local organizations in the new state, such as clubs and religious groups.
Apply for a homestead exemption if one is available. In some places, such as Florida, a homestead exemption is applied to real estate taxes.
Each person’s tax status is unique. When considering a change in residence, please contact your financial and tax advisors.

— Paul J. Ayotte, Fidelis Capital’s founding partner, and a client adviser

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