Can we help you find something?

Key Takeaways & Insights

Changing residency is not as simple as one would think. Extreme care must be taken and you must have a game plan ready to execute. Be sure to connect with your Cerity Partners financial advisor in the beginning phases of your planning. With their expertise and guidance, you will be better prepared to avoid to avoid the pitfalls that snag the unwary.

DOWNLOAD PDF

  • Domicile versus statutory residency
  • Steps to a bona fide change in residency
  • Hidden tax traps surrounding compensatio

It is all over the news: people are moving out of high tax states in droves, and Florida seems to be the new popular destination. Obviously, the beautiful weather and more relaxed pace are two benefits, but the freedom from state income taxes is also an important consideration. And while the Sunshine State welcomes its newcomers, many newly minted Floridians are finding that their former states are much more reluctant to let them go.

Domicile versus Statutory Residency
Most states have two separate tests for determining whether a person is a resident, and therefore subject to tax there. The first test involves one’s “domicile.” A person can only have one domicile, which is the location of their permanent home, and the place they return to after a temporary absence. It is the center of one’s activities. For example, it is where family resides, where children go to school, and where one’s community ties are based, such as business activities, medical services, club memberships, sports activities, religious organizations, and volunteer work. It is also where one’s most valuable possessions are located, such as family heirlooms, artwork, and even pets, to name a few. These factors are considered all together when determining where one is domiciled. The other test is referred to as a “statutory residency” test. While one may move their family, valuables, and pets, and may take all of the usual steps to establish residency in another state, the former state will still consider them to be a statutory resident if they maintain a physical dwelling unit in the former state and if they are present in the state for 184 days or more during the tax year. Keep in mind that less than one minute in the state will count as a day of presence for these purposes.
Steps to a Bona Fide Change in Residency
When making a move, it is important to commit. You should take all the obvious steps as soon as possible, such as changing driver’s licenses, voter registrations, and mailing addresses, as well as moving valuables. If moving to Florida, you should also apply for a homestead exemption on your new Florida home and update your estate planning documents to reflect Florida laws. Set yourself up with new healthcare practitioners and center your community activities within your new home state. If you keep an accessible dwelling place in your former state, make sure to stay out of your former state for more than 183 days in any calendar year. To the extent possible, minimize your ties and travels to your former state, and make sure to keep a daily calendar of where you are on each day of the tax year. The burden is on you to prove that you are no longer a resident. A residency audit will involve an intrusive search into your personal life, and you will be required to present records of your key fob swipes, for example, as well as itemized cell phone bills, credit card statements, travel reservations, and EZ Pass toll records to name just a few. There are no limits to the level of scrutiny, so excellent recordkeeping and documentation are essential to overcome the assumption that you are still a resident of your old state.
Final Consideration
You may win the residency audit, but also beware of the other hidden tax traps surrounding your compensation. For example, that you moved from New York to Florida in 2021. In 2022, you exercise stock options that were granted to you in 2018, while you were still living and working in New York. In this scenario, you will still be subject to tax as a New York nonresident based on the number of days you worked in New York between the date of grant and the date of exercise.

 

For more insights, contact a Cerity Partners advisor or visit the thought leadership section of ceritypartners.com.


Please read important disclosures here.


Meet the Author

Cheryl Donaldson

Principal

Cheryl is a Principal and a member of the firm’s Executive Financial Counseling team. With over 20 years of extensive tax and legal experience, she provides comprehensive tax analysis, planning, and guidance as part of the overall financial plan for corporate executives and high net worth individuals.

Prior to joining the Cerity Partners team, Cheryl worked as an independent consultant/quality control reviewer. Her clients included law firms, CPA firms, and a boutique financial planning firm serving creative artists. In addition, she provided tax services to her own individual clients. Before moving to Florida, Cheryl was a Staff Attorney in the Parsippany, NJ office at The Ayco Company, a Goldman Sachs company and she subsequently worked there remotely and seasonally as a tax reviewer for many years. Before working at The Ayco Company, Cheryl worked at Andora & Romano in Paramus, NJ as an elder law attorney.

Cheryl earned her Bachelor of Arts degree from Tufts University and her law degree from New York Law School. She is admitted to the Florida, New York, and New Jersey bars, and is an Enrolled Agent with the IRS.

Connect with Cheryl

Sign Up for Market & Economic Outlooks

Get the latest insights and analysis from our investment team delivered right to your inbox.