The Trump Tax Plan (aka Tax Cuts and Jobs Act or TCJA) was supposed to make filing taxes simpler and cut the tax bills of millions of hard-working Americans. Like many things out of Trump’s mouth, both of these statements appear to be far from the truth. According to new data from the IRS, Americans paid an additional $93 billion in individual income taxes for 2018 compared to the taxes they paid in 2017. I know I sure paid a whole lot more in taxes.
Is it worth moving to a low tax state to pay less state income taxes?
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Many of the taxpayers hardest hit by these increases in tax liability are those living in higher-tax states like California, New York, New Jersey, and so on. With taxes in the news, people have been looking for more ways to minimize their current tax liabilities. Moving from a high tax state is one of the ways some people have come up with to pay less in income taxes.
Can you really just pick up and move states, to save on taxes? The answer is it depends. I recently spoke with a couple who just got hit with a whopping tax bill from the state of California after they tried to game the system. Their attempt to move was lackluster, and they got busted by the tax authorities. They now owe several years of back state taxes as well as penalties and interest. We are talking several hundred thousands of dollars here.
They lived and worked in California, but tried to use a post office box in Nevada (a state with no income tax) as their home address. With their combined incomes above $1 million per year, they would be hit with state income taxes as high as 13.3% here in California. This is in addition to the federal income taxes they would owe.
The California Franchise Tax Board is not stupid; they will look into whether you have actually moved out of the state. Moving your primary residence is not a simple as just spending 183 or so days in a low-tax state. Proving you have left a state will require you to demonstrate that you have truly established a new domicile elsewhere.
What is a Domicile:
I hate financial jargon as much as the next person, but when talking tax planning, we need to be as specific as possible. The term “domicile” refers to the place where an individual (or married couple) maintains their permanent home and the place to which they intend to return to. Ok, a permanent move doesn’t have to mean till death, but it doesn’t entail more than just visiting for a really long vacation.
Picture the pro-athlete that has their primary residence in one state, as well as a second home near whatever team they happen to be playing for this season. When my father (Mike Rae) played in the NFL, he had a home in southern California, but also had homes near the various teams he played for (Oakland Raiders, Tampa Bay Buccaneers, Washington Redskins).
To establish domicile, most states will require two primary elements 1) an actual residence (home, house, apartment, condo) 2) the intent to remain indefinitely. While an individual may reside in several places, you can only have on domicile — picture snowbirds who spend the winter months in a warmer climate like Palm Springs, Florida or Arizona.
Moving between your various residences does not automatically change your domicile unless you take additional steps to make your new home your domicile.
When a domicile has been established, it will continue to be the domicile until the individual moves to a new location with the intention of this move being permanent.
When moving domiciles, it is important to take as many of the following steps to help ensure you have adequate proof that you have truly moved to a new state. Taking these steps to establish a new domicile is even more imperative when moving from a high tax state like California or New York to a lower tax state. Just spending 183 days in your vacation home in a low tax state will not automatically qualify you to establish a new domicile. FYI, there are seven states with no income taxes, but would you actually want to live in any of them?
For those who choose to skip taking these (annoying) steps, you may find yourself getting slapped with unintentional state income and even estate taxes. Additionally, you may have to pay other costs associated with a state tax audit, which can be ominously stressful, time-consuming, and expensive.
Here are fourteen steps you should take when attempting to establish a new domicile.
Update your driver’s license when moving your domicile.
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1. Update Your Licenses
Yes, going to the DMV is a nightmare, but transferring your driver’s license to your new state is a must. Also, update your auto registration to your new state.
Go the extra mile and update your professional licenses as well.
2. Change Your Address
This may seem obvious, but believe me, it is not. Use your new address as the mailing address for as much as possible. The bare minimum is to use the new address on state and federal tax returns. Report and pay taxes owed in your new state, and avoid reporting and paying taxes in your previous state.
Declare your new state as your domicile on all forms and documents that require listing a residence. Have newspapers or magazine subscriptions sent to your new address, assuming you still get the news in print?
3. Get a Job in the New State
Working in a new state is one of the best ways to prove you live there. I run the FinancialPlannerLA.com blog, I have an office in Los Angeles for my firm DRM Wealth Management, I own a home in Los Angeles, and a majority of my financial planning clients are her in California, it would be hard for me to claim to be living in Florida.
This may be more complicated if you work remotely or have several sources of income. That being said, do what you can to establish that work is being done in the new state. Nearly as important is proving that work in NOT being done in the old state.
4. Maximize Time in the New Domicile
By all means, take a vacation wherever you want, but do what you can to spend as much time in your new home (domicile). Similarly, do what you can to avoid spending large amounts of time in the old state. Your travel records, telephone usage, and even utility bills could be used to prove some of these things.
5.File a Sworn Statement to Establish Domicile
Some states like Florida and Nevada will allow you to file a sworn statement in the office of the clerk of the circuit court declaring yourself as a resident of the state. Again, a hassle, but another way to show you living in your new (lower tax state).
6. Update Your Estate Plan
Updating your Living Trust is one way to prove you have moved that I would probably only recommend for those who are elderly or who are in the highest tax brackets. Estate planning is difficult enough, but redoing an estate plan for a new state may be overkill, especially if you don’t expect to actually be there permanently.
To establish a new domicile in a low tax state cut business ties in your old state.
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7. Cut Business Ties in the Old State
Look to terminate active participation in any businesses that are specifically located in your former state. If your work can only be done in person consider terminating professional licenses in your former state and establish new professional licenses in your new state.
This option mostly applies to business owners who are running one or two businesses. If you are the owner of a national company, you don’t need to shrink your business down to one state. On the other hand, if all of your income is derived from one bar on the Sunset Strip, you will need to work harder to prove you no longer live in Los Angeles.
8. Join a New Church or Temple
If you happen to be a member of a Church, Temple or even group like BNI or Rotary establish similar membership in your new domicile.
9. Move Bank Accounts to New State
At this point, you are likely working with a national bank like Chase or Bank of America. If this is the case, you can likely just update your address and home branch.
If you are working with a local bank (without branches in your new state), you should close out old accounts and establish a new one in your new domicile. Also move your safe deposit box, if you have one, and store your valuables near your new home.
10. Move Your Stuff
Home is where the heart is, home is also where your stuff is. Just renting an apartment in a low tax state and never moving in, won’t establish your new domicile. You will need to make the effort to move your stuff in.
Related: Should You Move States To Have A Better Retirement?
As I mentioned above, the couple that prompted this article tried to move to a post office box in a low tax state. Talk about a tiny home, just kidding, this trick will not be sufficient to establish new domicile.
Primary school kids run holding hands in corridor, close up
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11. Register the kids for School
Assuming you aren’t sending your kids to boarding school, make sure to register them in a school near your new home. No one will believe your kid’s commute from Texas to Beverly Hills for school every day. Not taking this step is a big giveaway that you have not moved to your new domicile.
12. Shift Real Property
Selling real estate in your old state is a great way to show you are moving. Purchasing property (or leasing a new home) in the new state is also a great way to establish where you will be living next.
Join a gym in your new low tax state to help establish domicile.
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13. Join the Gym:
I want everyone to live a happier, healthier, and wealthier life, and working out is a good step in that direction. However, believe it, or not your gym membership can help establish that you have moved. I recently spoke with a tax attorney who had used gym records to help prove his client had actually moved from West Hollywood to Miami, Florida.
First, they showed that his client had canceled his Equinox West Hollywood gym membership. Next, they showed that the client has signed up for a new gym in Miami. Lastly, they established that the gym junkie client had checked into the Miami gym more than 200 days during the tax year in question.
It is hard to go to the local gym if you aren’t local. Hopefully, this will provide a little extra motivation to work out a bit more often.
14. Register to Vote in Your New State
You should register to vote in your new home state, for all upcoming elections from local to national. Going a step further, you should be aware of where you make political contributions. Make them to politicians in your new state rather than your old state.
Paying taxes sucks. You may be able to pay a lot less in taxes in your move to some of the lower tax states. Of course, you could end up making a lot less money if you live in the wrong state. Either way, if you do end up moving states, make sure to take as many of these steps to avoid the hassle of a state tax audit.
Would you ever move to save on taxes?