By Anthony Wimperis, CPA, CVA, MST
Moving to a new house is undoubtedly an exciting adventure, but it comes with its fair share of challenges, including the intricacies of state taxation. Whether you’re relocating for a job, personal reasons, or simply seeking a change of scenery, it’s crucial to grasp how your new state will tax you as a resident.
When you move to a new state, two primary factors come into play regarding your tax status: domicile and statutory residency.
- Domicile is established when you make a legal, permanent residence within a state, often involving the purchase of a house, condo, or renting an apartment. It’s essentially your default place of return after being away. You can only have one domicile – and it only ends when you abandon it.
- Statutory residency is determined by the number of days you spend in a given state, typically exceeding 183 days, and you maintain (a ‘permanent place of abode’) – a second home, vacation, home, apartment, condo, etc…
Changing your domicile is a significant step and involves more than just physically relocating. It requires demonstrating that you do not intend to return to your old home. For instance, selling your old home and moving into your new one in the new state is the simplest scenario. In this case, it’s challenging to prove your intention to return to the old state, as someone else now resides in your former house.
Typically, when changing domicile, the two states involved will pro-rate your income for the year based on the date of your move (the ‘line in the sand’). You’ll need to file part-year resident tax returns in both states for the year you moved. The following year, you’ll be a full-year resident of your new state, requiring only one state tax return, and no need to file in your old state.
If you choose to keep both homes in both states, the process becomes more complex. Proving that your domicile is in the new state is essential in such cases. Statutory residency rules can significantly impact your tax status. For instance, if you split your time between states, such as living in Connecticut and spending winters in Florida, it’s crucial to maintain a calendar or a log of where you spend your days to convincingly establish Florida residency.
Establishing a domicile in a new state requires careful planning and documentation. Here are recommended steps:
- Maintain records supporting your physical presence in the state, including credit card transactions, ATM usage, personal diaries, travel records, phone records, and smartphone location tracking.
- Obtain a driver’s license and register your vehicle in the new state.
- Register to vote and obtain a local library card in the new state.
- Open and actively use bank accounts in the new state while closing accounts in the old state.
- Purchase or lease a residence in the new state, either by selling your old residence or renting it out at market rates to an unrelated party.
- Update your mailing address on essential documents such as passports, insurance policies, and wills or living trusts to reflect your new domicile.
Embarking on the journey of moving to a new house is an exhilarating experience, but it’s essential to be well-prepared for the tax implications that come with it. Understanding the concepts of domicile and statutory residency is key to ensuring you navigate the complexities of state taxation smoothly.
So, as you prepare for your exciting adventure in your new home, remember that a well-planned approach to your tax situation will make the transition even more enjoyable. Reach out to an R+R tax advisor for personalized advice and peace of mind, and embrace the opportunities that await you in your new state. Happy moving
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