Changing your domicile for tax purposes

By diamondcpas Personal Taxes Comments Off on Changing your domicile for tax purposes

For years, taxpayers, and in particular, wealthy taxpayers, have sought to reduce their tax burden by establishing residency in states with lower tax rates.  Florida is a favorite destination because it has no state income tax.

Financial experts warn that the process is more challenging than it appears, however.  While you can have more than one residence, you can have only one current domicile (tax home). In the past, you could claim your tax home as the place where you spend more than half your time. That is no longer true.

Simply buying a home in Florida does not change your domicile from Pennsylvania, New York or New Jersey to the Sunshine State. For the purpose of taxes, your domicile is “where the heart is,” tax advisors note. That somewhat vague description is defined by states, in part, as where you return after traveling, where you vote, attend religious services, bank, have a driver’s license, where your doctors are and where your largest or most expensive home is. Each state has its own requirements, and New York’s, where taxes range from 4 percent to 8.82 percent, is the most restrictive.

It’s also important to note that states may evaluate information about your spending habits to establish residency. Credit card and ATM transactions, E-Z Pass data and charges to Uber, Lyft and Grub Hub create a digital footprint reporting when and where you are spending money. Tax experts agree that “We may be a more mobile society, but we are also less anonymous.”

Even if you’ve established your domicile in one state, you can still be held responsible for taxes on income earned in another state.  And keep in mind that these rules affect not only your current income taxes, but your estate and inheritance taxes when you die. A northern state might try to assess death taxes on your estate if you haven’t done a thorough job establishing your southern home as your domicile.

As always, it’s wise to consult a one of our tax advisors with any questions you may have on this topic.

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