If you’re a financial advisor with clients looking to relocate from a high-tax state to a lower-tax one, know this: The state your client plans on leaving may very well be watching, ready to pounce with a state tax audit to collect some of the tax revenue it will be losing.
New York state, for example, conducts roughly 3,000 non-residency audits annually and has collected approximately $1 billion in revenue between 2010 and 2017 as result of these audits.
The incentive for residents to relocate to lower-tax states and for audits by high-tax states like New York, New Jersey, Connecticut and California has increased after the passage of the massive 2017 tax cut bill, which instituted a $10,000 limit on state and local tax deductions, starting with the 2018 tax returns.
“My clients typically want to become a Florida resident where there’s no estate tax, no income tax and lower property tax rate,” said Eugene Pollingue Jr., a partner in the West Palm Beach, Florida, office of the Saul Ewing Arnstein and Lehr law firm.
They key to avoiding a tax audit when they make the move, says Pollingue, “is complying with the rules of the state they’re leaving from so that state doesn’t still consider that person a resident but one who has moved their domicile … You can’t just buy a condo in Florida and say you’re a Florida resident,” Pollingue said. “You really have to be a Florida resident.”
States have different qualifications for taxpayers to establish their residency.
The most common qualifications are based on time spent in-state within one year, often coupled with owning a home there. New York state, for example, will consider an individual a resident subject to full state income taxes if among other criteria the individual person maintains a permanent place of abode in the state for more than 11 months of the year and spends more than 183 days in the state — just over half a year. New Jersey and Connecticut have similar rules but use one year for their definition of permanent place of abode; Maryland uses six months.
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