By David Thatcher, CFP®
Californians pay some of the highest taxes in the nation, thanks to state and local taxes like the sales tax and income tax. Now, with the loss of most of the state and local income tax deduction, many Californians are considering a move to Washington or Florida or other states that do not have an income tax and/or estate tax.
Changing residency could save you thousands of dollars in taxes and it could save your heirs a significant amount of money as well. However, changing residency is not as easy as you think. Just submitting a change of address to the post office won’t be enough to keep the Franchise Tax Board away from you.
If you’re considering changing residency for tax purposes, you need to do so in accordance with the law and be able to back up your assertions. Here are some suggestions that should help:
How many people do you know that have moved on January 1 or December 31? While it may make your calculations easier, if you list either of those as the date you moved it is a huge red flag. Most people move on other, non-holiday days of the year, and the tax board will be suspicious. Make sure to list the correct date that you moved on your income tax return. If you did move on either January 1 or December 31, make sure you have documentation to prove it, such as a receipt for a rental van.
Most people don’t move without a reason. Common reasons for moving are life events, such as retirement, a new marriage, health issues, a new job, or something else that would lead to a permanent life change. Lowering your tax bill isn’t a valid reason in the eyes of the Franchise Tax Board, so you should have another reason for your move and be able to document it, if possible.
Under the California Revenue & Taxation Code, you are a resident if you are present in the state for any reason other than a “transitory or temporary purpose” or are domiciled in the state and leave for a “transitory or temporary purpose.” A “transitory or temporary purpose” could be a brief rest or vacation that lasts no more than 6 months. However, during that brief rest or vacation, you must not conduct any business and you must maintain a home elsewhere. Retirement, a long recuperation, or business that will last a long or indefinite period do not count as “transitory or temporary purposes.”
If you are in the state for more than 9 months, you are presumed to be a resident, while you have to be gone at least 18 months to be presumed that you are no longer a resident.
Your domicile is your permanent residence, your home. In order to change residency, you need to establish a new domicile in another state. Your domicile should be the center of your life, and this can be shown by:
If you do those things, it will be very difficult for the Franchise Tax Board to argue that you haven’t truly established a new domicile and should still be considered a California resident for tax purposes.
Remember, just because you change residency doesn’t necessarily mean you will not still owe California taxes. If you own a business or earn any kind of income in California, the state will collect taxes on that income regardless of your residency. In fact, having, buying, or incorporating a business in California could signal that you haven’t really changed residency, especially if you maintain a home and significant contacts in the state. That could undermine your attempt to change residency.
If you’re fed up with California tax rates and are considering a move up the coast to Washington or want to seek out the sunshine in Florida, it could save you a lot of money. You just have to make sure to follow the rules and keep good records. It’s important to develop a plan before you make the move and understand all of the ramifications. Contact one of our offices today to talk to a financial planner who can walk you through how an interstate move could affect your finances and the legacy you leave to future generations.
About Cypress Wealth Services
Cypress Wealth Services, an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. CWS is comprised of professionals with diverse backgrounds and extensive experience and qualifications. CWS is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert and Anchorage, the firm serves clients across the country. Learn more by visiting www.CypressWS.com.