Napolitano looks at money.
Retirees commonly claim that they plan to leave their high tax state for a no-income-tax state. Now that baby boomer retirement is in full swing, there are thousands of taxpayers attempting to pull this off as I sit here and write. Unfortunately, because of the masses on the move and the recent success by some states at auditing these domicile changes, you may be inviting a state tax audit by joining in.
Let’s set the record straight with an example. If you sell your home in Massachusetts and buy a home in Nevada (or Florida) and really move everything there, you are clearly a resident of that state and will be taxed according to their income tax rules. The exception would be any income producing assets that still exist in your former home state of Massachusetts. This may be an active trade, business or rental real estate, where net income would still be taxable in the jurisdiction in which it operates.
In the past, domicile changers would focus on one main issue, time. That is, how many days of the year are you in the state where you claim to be a resident? The old rule of 6 months and a day is still part of the equation these days, but not the sole factor. Furthermore, strict adherence to the time rule alone does not qualify you as a resident of the new tax free state.
There are five major categories of factors.
Time is one of them, and to be safe ensure that you have at least 183 days (ideally more) in the state where you plan to claim residency. Be precise with your counting, it is very easy for anyone to verify where you actually were on any given day.
State tax authorities have successfully subpoenaed taxpayer cell phone and credit card records to prove cases. If you lose this test, all bets are off so be precise and stay longer than the minimum.
The second factor is active business involvement. If you are actively running a Massachusetts based business from your deck in Lake Tahoe … you’ll likely be challenged by the tax authorities regarding other income not stemming from the business.
Next is the home itself. If you keep your family residence in the old state and buy a small condo in the new state, you’re opening yourself up to yet another challenge. The two tests with respect to the home issue are: did you actually change your residence and did you abandon the former residence?
This next one is a killer; items near and dear to you. This includes your photos, dentist, primary care doctor, artwork and prized belongings or your actual family members. If you’ve left without items that are deemed near and dear to you, like the family dog, you’re leaving yourself open to a possible issue.
Don’t take this lightly. If you try to get by with weak facts, the results of a failed audit would be back taxes, penalties and interest.