When Does It Make Sense To Change Your State of Residence?

Why Domicile Changes Appeal to More and More Wealthy Families

If you’re a high-net-worth individual, opting to change your state of residence — also called domicile change — can be a key strategy to minimize taxes. Some people may move because of a new job or family reasons. But financial perks can also be a powerful driver, prompting some millionaires to move to states with low (or no) state taxes.

Recent data from the U.S. Census Bureau suggests that Americans are leaving high-tax states and moving to ones with a lower tax burden. Remote work policies that took off during the COVID-19 pandemic could have contributed to this trend.

Changes in tax laws that cap the amount individuals can deduct from their taxable income may also have prompted wealthy families to consider a change in domicile.

Changing States Is About More Than Income Tax

If you are thinking about moving out of a high-tax state to reduce your tax bill, there can be legal and tax ramifications to consider. It’s important to understand the rules, terminology, and state-specific taxes. Otherwise, you run the risk of paying double taxes on your income, or penalties such as underpayment fines and interest on unpaid taxes.

For example, a domicile is someone’s permanent home, whereas residences are considered to be any place a person stays. Someone can have multiple residences but only one domicile at a time. Many people assume they will be required to pay taxes only in their domicile state. But if you spend significant amounts of time in other places, you might owe taxes there, too.

It’s crucial to consider additional taxes as well. Look at the costs of property and sales taxes, plus any taxes for high-income individuals or people who purchase expensive property.

Individual state rules on estate and inheritance tax rates can also be a factor. Estate taxes are applied to what a descendent owned at death, whereas inheritance taxes are imposed on the recipient. The majority of states don’t assess either tax, while a handful impose only one or the other. Maryland is the only state to require both.

A Quick Guide To Changing Your Domicile

Another aspect to be aware of is that changing your resident status might trigger an audit, particularly if you move from a high-tax state. A financial advisor can help minimize the risk of an audit and also ensure you meet your obligations. That might involve creating a paper trail documenting your new primary residence.

Here are some steps that can help you establish a new domicile:

Get a driver’s license in your new state.
Register to vote in your new state.
Apply for vehicle tags in your new state.
Check if your state has a formal filing process. Florida, for instance, requires residents to file a Declaration of Domicile with their county’s clerk of court.
Find medical doctors in your new state.
Get involved in your new community, such as joining places of worship, clubs, or the library.
Relocate valuable items such as family heirlooms to your new residence.

A wealth advisor can help you navigate the rules and implications of living in different states, including the impact on your estate plan and current tax situation. Ready to make the move? Contact Griffin Asset Management to speak with an expert today.