The Impact of Your Residence on Your Taxes

When it comes to income and estate taxes, not all states are created equal. Keep reading to learn more.

Every once in a while, I have a client come to me for advice on a big move. Where can they go to maximize their money? From a financial standpoint, there are a few considerations to take into account. As the fiscal year comes to a close, many are wondering if establishing a new domicile is smart and/or feasible. And if so, what action steps need to take place to reap any benefits of a big move.

While I don’t give accounting advice, I will share a bit of the information I’ve gleaned over the years. What many people don’t know is that taxes vary drastically from state to state. For instance, in Florida, the state charges neither income tax nor estate tax.

While the overall federal income tax system is progressive, not all taxes increase incrementally based on your earnings. Individual income taxes and the estate tax are all progressive; most states take directly from your paycheck, regardless of the amount you earn. Estate tax, also known as the death tax, is the tax your beneficiaries pay on your estate, the money you leave to your heirs when you pass.

According to PwC’s Tax Insights Issue 2020-13, for 2020, US residents (and citizens) are entitled to a US estate tax unified credit of approximately $4,577,800.00, which essentially exempts $11.58 million of property and assets from estate tax. However, if you’re worth more than $11.58 million at the time of your death, your beneficiaries will pay taxes on the amount that exceeds $11.58 million. For example, if your estate is worth $14M, the estate will be taxed on $2,420,000.00 M ($14M – $11.58M).

Unless? you live in Florida.

And Florida isn’t the only state like this either. If alligators aren’t really your cup of tea, there are five other states that don’t charge income or estate tax: Alaska, Nevada, South Dakota, Texas and Wyoming (listed alphabetically).

To declare a state as your “domicile” or “permanent residence,” you’ll need to do some research, as rules vary from state to state.

For example, in Florida, you need to be there for a total of 183 days each year, just over half a calendar year. The days do not have to be consecutive, but you do need to stay the night at that residence.

To ensure that these rules are being followed, the IRS may request your bank or credit card statements, proving that you’ve made purchases where you’re residing.

You’ll also need to make sure your documentation is in place to establish your domicile. This means, for example, filling out the necessary paperwork and applying for a driver’s license or other official ID in the state you’re calling home.

So why do states do this? Well, it actually makes perfect sense. States like Florida are more likely to attract wealthy people, especially ones who are trying to hang on to their money.

Considering a big life change? I would love to work closely with your Accountant and Trust & Estate attorney to help you plan for a financially stable future.

Let’s connect.

A.G.P. / Alliance Global Partners and its representatives do not provide tax advice. The discussion of tax matters in this material is interpretation of current tax law and is not intended as tax advice. You should consult a tax professional for information relating to your particular situation.