Read This Before Moving to a Low-Tax State

As several jurisdictions in the US have decreased their personal income tax rates in 2024, many Americans got an additional incentive to consider moving to a lower-tax state. However, while some may change their location on a whim, it is often better to be safe than sorry and account for all aspects of moving to another tax residency, including housing, employment and other opportunities and costs. Here are some thoughts on whether someone can benefit by moving to a new tax residency and what it really takes to be considered a tax resident in a new state.

Weigh Up All Pros and Cons Beside Income Tax

While minimizing your state taxes or cutting them to zero might seem like a no-brainer, it is always recommended to have a whole picture before making any strategic moves. For example, for someone paying $3,000 per year in state income tax, moving to a new state just to change tax residency might not be worth it. Conversely, if you live in a state with high-income tax and are paying five to six figures annually in state taxes, moving to a lower- or zero-tax state could be a viable option.

In addition to the relocation costs, there are multiple other considerations that impact the overall financial picture when changing residency for tax purposes. For example, you may need to account for:

◾ employment opportunities available to you after you move to a new state,

◾ housing opportunities and costs for properties similar to what you currently have in your state,

◾ costs of living at the new location,

◾ costs of healthcare, education, transportation, and other services you will need at your new place,

◾ other taxes you would have to pay in the new state, such as sales tax, property tax and other regulatory fees.

Check Your State Tax Rules

When deciding to change a tax residency, it is important to understand all the implications it takes to be considered a tax resident in a new state by the tax authority. Unfortunately, there are many misconceptions about changing the tax residency, with many people thinking that the only thing they need is to live somewhere for more than 183 days.

For example, in New York State, you can be considered a resident for tax purposes whether you live in the state or not for any portion of the taxable year if you maintain a so-called permanent abode within its jurisdiction. According to the New York state regulations, a permanent abode is an owned or rented property suitable for year-round use which someone permanently maintains.

Another test for an abode is whether your spouse owns or leases such a place. Consequently, simply living outside of New York for 183 days while maintaining a permanent residence there would not automatically rescind your New York taxpayer status.

Consult Your Tax Advisor

Tax residency rules are state-specific and require careful analysis. For example, an individual domiciled in New York will not be considered a New York state resident for tax purposes if they fall under exceptions, such as staying out of the country for at least 450 days out of 548 consecutive days. You need to consult your tax advisor for tax residency rules both for your current state and in the low-tax state where you are interested in obtaining residency.

In addition to state income taxes, you will need to take into account other taxes, including sales tax, property taxes and other applicable levies. You can only know if you can save money by moving to a low-tax state when you evaluate the overall tax landscape and have a detailed calculation for your individual circumstances.

Secure Proof to Establish Your New Tax Residency

When you are audited for paying state income tax, you bear the burden of proving your intent to establish a permanent home in the new state to change your tax residency. Taking New York as an example, you need to prove that you abandoned your domicile in the Empire State and established it in another jurisdiction.

There is no single test to prove that you abandoned your domicile in New York State or established a new one in another state so that the tax authority will assess your overall situation before deciding on your tax residency. In most cases, individuals who want to change their tax status are advised to:

◾ update their bank account address to the new state,

◾ change their New York driver’s license to that of the state where they seek to become tax residents,

◾ vote in the state where they claim new tax residency,

◾ close their membership in NY organizations such as gyms, clubs or subscriptions and join other organizations in their new state,

◾ hold family gatherings in the new state.

The above list is non-exhaustive and is intended to give a general understanding of what it takes to prove your tax residency. You will need to consult an experienced tax advisor who is competent in tax rules applicable in your old and new state to help you with your tax planning and prepare you for audits.

Track Your Residency Start and End Dates

Last but not least, you will also need to track the days you spend in each state to prove your tax residency. You may consider using a trip itinerary planner or travel app to prove your location and the days you spend in each jurisdiction.Today, there are several travel planner apps, such as Flamingo Travel Days Tracker, that can be used for automatically tracking days spent in different US states. Flamingo automatically records your location and time spent in each jurisdiction, so that you don’t have to remember the dates of every trip you took and manually input it into the app. Besides, you can easily export a comprehensive report of your travels to provide to your tax advisors or auditors, making tax filing much less stressful.