Whether to be closer to family member or a new job opportunity, individuals are increasingly relocating to another state. If reduction in the applicable state income tax is a motivating reason, avoiding dual-residency should be a primary objective. It is very common for owners of certain assets (closely-held businesses, highly-appreciated assets, and/or highly compensated executives receiving unique bonuses or substantial compensation upon retirement or another corporate change in control) to attempt to change their applicable state residency prior to a sale or monetization of any such assets. Others will want to leave and move to a state without an estate tax. Certain states (e.g., California, New York, New Jersey) are arguably more organized and effective at identifying, challenging, and auditing any such taxpayers and may have rules that require accrual of income upon a change of residence. Careful planning and timing can help achieve desired objectives.
If you plan to make a permanent move to a new state, it is important to take certain actions, as soon as possible, in order to establish legal domicile in the new state. In general, the term “domicile” is defined as the place that an individual intends to be his or her fixed or permanent home or the place to which he or she intends to return after a temporary absence. Taking care of the basics – registering to vote, relocating to a new house, and obtaining a driver’s license – is only the first step of establishing your domicile in the new state. Below are a few additional actions you can take to affirmatively change your domicile from one state to another:
- Register your vehicle in the new state;
- Open bank accounts in the new state and close bank accounts in the old state;
- Sell or rent out your residence in the old state;
- Spend more time in the new state and keep a log to track your days spent in the old and new states (be wary of certain mobile device apps that track your time in different jurisdictions, as such information may be discoverable and be used negatively against you);
- Change your mailing address;
- Update your legal documents, such as wills, passports, and insurance policies, to show your new state of domicile; and
- Move your family members, pets to the new state.
Keep in mind that the list above is not exhaustive and the burden is on the individual claiming the new domicile to prove a change from the former state to the new state; keeping documentation of all of these actions is vital to establishing a new domicile.
Since there is no uniform set of laws to determine state tax residency and the definition of domicile varies from one state to another, it is important to understand the particular rules that apply in both the prior state and desired new state. In addition, several states (including New York) will impose their income tax on a non-domiciliary if they have a permanent place of abode in the state and spend more than 183 days or parts of days in the state. Therefore, before packing up and uprooting your family (and pets) to a new state, consult with experienced tax advisors in your current and future states to understand the state income tax consequences and what factors each applicable state looks at in determining whether a domicile is established (and terminated) as it relates to your particular residency in such states.