Changing a domicile can enhance the quality of life but needs to be planned carefully to avoid pitfalls that might not be immediately apparent. This article comes out at a time of considerable migration by people, including HNW individuals, to states such as Florida and Texas.

As readers know, the shift to remote working – even before the pandemic – coupled with the changing business, tax and political fortunes of the 50 states of the US, means that a lot of people have moved home. Florida and Texas, for example, have absorbed citizens leaving the likes of Illinois, New York and California. The Trump tax package of 2017, which removed deductions for state and local taxes, was one motivator. Certain states such as New Hampshire, Texas and Florida don’t have a local income tax, while other “bluer” states do so and for various reasons, including population density and higher public spending. On top of all that is a desire to move to different climes in pursuit of work and play – something that’s moved the US economy for decades. (Think of how the invention of air conditioning helped the “Sunbelt” to boom after 1945.)

There’s a lot to chew over, and to do that here is Scott Brian Clark. He is counsel with Day Pitney LLP and chair of the firm’s Multistate Tax Practice. The editors are pleased to share these insights; the usual editorial disclaimers apply. To jump into the conversation, email tom.burroughes@wealthbriefing.com

Beginning with the pandemic and continuing through today, we have seen a substantial uptick in people fleeing so-called “high tax” states (such as those in the northeast) to establish residency in states with lower tax rates. While it’s not a new concept, the new “work from anywhere” environment spurred by Covid-19 has allowed people the freedom to move, and many businesses and firms have opened or expanded their offices in places like Florida.  

The general cost of living and climate can certainly play a role for older workers who are nearing retirement and considering a move. This is why states with higher taxes like those in New England seem to lose people to states with better weather and a lower cost of living such as Florida, Arizona and Nevada. Businesses everywhere are dealing with it, as relocation issues have arisen more in the last two years than at any time in the past.

So, as this trend continues and people continue looking to change their domicile and relocate to a state with a more favorable cost of living, there are a number of issues of which they need to be mindful. There are some common mistakes that can be avoided with careful planning, and a number of benefits if done correctly.

In its most simple sense, one can change his or her domicile by merely intending to do so, and then actually residing for a period of time in the new location. However, for tax purposes, the difficultly lies in being able to prove that the change has taken place if, in fact, the old state enquires about it. It is the process of laying down the groundwork to prove the change that is somewhat complex and quite methodical – the process needs to incorporate a “road map” that over a period of time, will best serve to substantiate the change of domicile.

Oftentimes, those who would like to change their domicile take short cuts and don’t go through all the necessary steps. This is a mistake, as it could put them at significant risk when the state comes calling – and states typically do – whenever one changes tax filing status from resident to nonresident. Many assume that because in their own mind they have changed their domicile, the state will simply accept and recognize this. Not true. The level of proof required to support a change in domicile is quite substantial and places a high burden on the taxpayer. So, although one may have changed domicile in one’s mind, if audited, it still must be clearly proven in a clear and convincing manner.

To do it correctly, the process typically starts by drawing up a plan as to what the goal is, factoring in tax-related matters, benefits and risks. From here comes that critically important step of developing a risk assessment – including the aforementioned “road map” – around the factors that are important to a tax determination of domicile. This will include:

--  Reviewing the details and attributes relating to one’s home(s), such as cost, size, opulence and more; 
--  One’s “day count” as a resident, or the number of days you spend at each home and in other locations
--  Discussing one’s “active business” – what type of business and where it is; 
--  Location of items near and dear to the person, such as artwork, cars, jewelry, rare books and other assets; and 
--  Finally, the laundry list of other items which many states consider to varying degrees. This includes the location of family and close relatives, the location where one votes, where cars are registered, resident property tax exemptions, where doctors and advisors are located, club memberships and more.

With respect to “part-time” residents, many states also impose a statutory resident concept. In the northeast, people typically refer to this as the “six-month rule” – namely, that if one maintains a home in a state such as New York and is resident in the state for six months or more, one will be deemed a resident of New York irrespective of domicile. This is a key aspect to remember.

It’s important to keep in mind that the issue of domicile is also fundamental to the estate tax. Quite a number of estate tax assessments have been imposed in various states, even though the individual had long ago moved away. The concern can arise when one retains certain property which, while it may seem insignificant, could still come with a tax burden. This is one more area that needs to be a part of the overall plan when one wants to change domicile and do it in the correct way.

As with all major life decisions, changing domicile can enhance one’s quality of life whether in retirement or even earlier. But, as with everything else, it needs to be done with careful planning in order to maximize benefits and avoid the many pitfalls that people perhaps don’t know are there at the outset.