5 minute read
Moving to Florida: Tax Considerations and Pitfalls
BY GEOFFREY WEINSTEIN, ESQ., COLE SCHOTZ P.C. AND HENRY RINDER, CPA, ABV, CFF, CGMA, CFE, DABFA, SMOLIN LUPIN & CO. LLC
Sometimes, the decision to move from a high-income-tax state like New York and New Jersey to a state that does not impose an income tax, such as Florida, is precipitated by a taxpayer receiving substantial retirement income or the vesting and/or exercising of equity options caused by a change in control event. This article narrowly outlines critical state tax considerations and potential pitfalls of relocating to Florida.
Understanding Domicile Rules
A prerequisite to analyzing the state tax treatment of income earned by a nonresident is determining whether a taxpayer has effectively changed their domicile. Domicile is where a person has his true, fixed, permanent home and principal establishment and to which they intend to return whenever they are absent.
A person may have several residences or places of abode, but they can only have one domicile. To show that a different state is a person’s new domicile, generally it is necessary to show the physical assumption of a new home in that location, an intention to establish a new domicile in that location and an intention to abandon the old domicile.
Changing domicile from New York or New Jersey to Florida involves demonstrating a clear intent to establish Florida as a permanent home. The proper strategy includes, among other things, the taxpayer buying or leasing a substantial residence, moving to the new residence with their family, registering to vote, changing driver’s licenses and, most importantly, abandoning ties to the previous state of residency.
Domicile Versus Statutory Residency
Even if a taxpayer effectively changes their domicile to Florida, they can still be considered a statutory resident of New York or New Jersey if they maintain a permanent place of abode in one of those states and, with limited exceptions, spend more than 183 days in that state during the year. Not meeting the 183-day rule will automatically cause the taxpayer to be treated as a resident instead of a non-resident for income tax purposes.
The distinction between a resident and a non-resident is crucial. Residents are taxed on their worldwide income. Nonresidents pay tax only on income from the state. Proper documentation, such as credit card and telephone GPS records, utility bills and travel records, is essential; it’s a taxpayer’s burden of proof to show their whereabouts during a residency exam, and any unproven days by the taxpayer will be deemed a day spent in the former domicile.
Steps to Establish Florida Residency
To successfully change residency from New Jersey or New York to Florida, taxpayers should take the following steps:
Sell or rent out the property located in the former domicile. Simply owning property in a taxpayer’s former domicile does not automatically make one a resident; however, maintaining significant ties to these states can. Selling or renting out the property in an arms-length lease is perhaps the strongest evidence of a taxpayer’s intent to abandon their former domicile.
Establish strong ties in the new domicile. This includes buying or renting a Florida home that is larger or more valuable than the home in a taxpayer’s former domicile, moving their family there; registering to vote; obtaining a Florida driver’s license; joining local clubs and/or a house of worship; transferring medical care; and moving personal items and valuables to Florida.
Document time spent in each location. It’s vital to keep meticulous records of where time is spent to ensure that less than 183 days are spent in the former domicile. The taxpayer bears the burden of proof in residency audits, so being responsible and prepared with records is crucial.
Change mailing addresses and professional relationships. This includes the taxpayer notifying banks, brokers, accountants and other professional relationships of their new Florida address and moving their professional relationships (e.g., doctors, investment advisers, insurance agents) to Florida.
Potential Pitfalls and Audit Risks
State tax authorities are vigilant in ensuring that taxpayers who do not meet the non-resident criteria pay their share of tax, interest and penalties. Residency audits initially focus on several key factors of domicile:
Home: What is the comparative size, value and use of homes in the new versus former domicile?
Business involvement: Is there continued involvement in a business located in the former domicile?
Near-and-dear items: What is the location of personal items of significance, such as family heirlooms, collectibles and art?
Family: Where do immediate family members, especially spouses and minor children, reside?
Time: How much time is the taxpayer spending in the new versus former domicile?
If, during a state tax residency audit, a taxpayer either fails to show they effectively changed domicile or fails the 183-day statutory residency test, New York and New Jersey will generally tax all of their worldwide income, including pensions and deferred compensation such as performance-based equity compensation and change of control severance payments.
For a continuation of this article regarding the tax implications of a taxpayer being deemed a non-resident, visit njcpa.org/newjerseycpa/winter2425 .
Geoffrey Weinstein, Esq., is a member in the Tax, Trusts & Estates Department at Cole Schotz P.C. and can be reached at gweinstein@coleschotz.com . Henry Rinder, CPA, ABV, CFF, CGMA, CFE, DABFA, is a member of the firm at Smolin Lupin & Co. LLC and a past president of the NJCPA. He can be reached at hrinder@smolin.com .
