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If you’re a New Yorker who spends half the year in Miami, you’ll have to do more than that to be considered a Floridian.
Moving to an income tax-free haven like Florida, Nevada or Texas is a tempting prospect for residents in high-tax states such as New York, New Jersey and California.
The new $10,000 cap on the state and local tax deduction on federal taxes, a feature of the Tax Cuts and Jobs Act, only makes those tax-free states even more attractive.
Consider that the top income tax rate in New York is 8.82%, while the top rate in California is 13.3%, according to the Tax Foundation.
If you’re thinking of moving from your high-tax locale, chances are your state’s income tax auditor won’t let you leave without a fight.
“What do you have to do to become a Floridian?” said Mark S. Klein, tax attorney and partner at Hodgson Russ. “You fill out an affidavit of domicile, you register to vote and the confusing part is that the clerk will say ‘Welcome to Florida.'”
He spoke on the issue before an American Institute of CPAs’ conference recently in Las Vegas.
“Maybe in the eyes of Florida you’re a Floridian, but in the eyes of your home state, you’re not,” Klein said.
States generally have two tests to assess residency.
To be considered a statutory resident — and taxed as a resident of that state — you had to have spent 183 days there during the year and you must maintain a permanent place of abode there.
The domicile test considers five key aspects that determine whether your true home — the place you return to after you’ve been on the road — is in fact in that state.
These are the five factors that determine your domicile and that are likely to be studied in any audit.
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Owning a home in a zero-tax state isn’t enough keep the auditors off your back. You can have many residences but only one true domicile.
“If you want to lose your case with the auditor, you keep your big and beautiful home in Minneapolis, but you rent in Boca Raton,” said Klein.
Sell the abode in your original home state and show you’ve made a commitment to leave.
You spent 120 days in your old home? You need at least 240 days in the new home.
Mark S. Klein
tax attorney and partner at Hodgson Russ
In one case, Klein had a client who sought to move from western New York to Florida, with the plan of selling stocks and paying no state taxes on capital gains.
While moving south, this client decided to maintain his fishing license in western New York, where he paid $12 as a resident. Had he purchased a fishing license for visitors, he would have ponied up $75.
An auditor would seize on this slip-up and cite it as evidence that this individual was still a resident of the Empire State.
“He was so cheap that he only paid for the $12 license, and that came to bite him,” said Klein.
2. Where’s your business located?
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Got a business headquarters in New York or in California? Do you maintain an office there?
If so, your state’s auditor might also argue that you’re spending plenty of time there.
Indeed, maintaining your headquarters in Los Angeles while stating that your residence is in Las Vegas will invite scrutiny.
“We care about what you do, and not just where you do it,” said Klein.
3. Time out of state
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Spending 183 days in your new state isn’t enough.
“What I tell people is this, you need to have your head on the pillow for two nights in the new home for every one you spend in the old,” said Klein.
“You spent 120 days in your old home? You need at least 240 days in the new home.”
Other questions that might come up in an audit include “Where do you spend your weekends? Where does your spouse wait for you when you travel,” according to Klein.
4. “Near and dear”
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When people move, the objects they hold dear will go with them.
State income tax auditors want to know where you keep the things that are most valuable to you, including your family photos and your grandmother’s china set, Klein said.
“Auditors expect to see moving bills,” he said. “I’ll tell clients with as much effort as I can: Please find something to move.”
5. Your family
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Where you, your spouse and your minor children reside will tip auditors off to where you’re truly based.
“The presumption is that spouses share a life together and thus share their domicile together,” said Klein.
A situation in which one spouse has business activities in New York, while the retired spouse is residing in Florida could draw attention from an auditor.
“If they’re constantly traveling together, it’s hard to say that one’s a Floridian and the other’s a New Yorker,” said Klein. “How do they not share a domicile?”
Couples who assert that they live in different states need to walk the walk.
“It’s possible for them to not share a domicile together, but it’s unusual and difficult to prove,” said Klein. “They have to start living separately if they’re going to make this argument.”