With the addition of the “millionaires’ tax” in Massachusetts taxing income over $1 million at 9%, more and more people are beginning to rethink where they want to be a resident. The professionals at KN+S have been overwhelmed by discussions with clients considering a move out of the state. It may be a short move to New Hampshire (no personal income tax), or to the South to places such as South Carolina, Tennessee, or Florida. Our practice has seen dozens of high net-worth individuals begin to move elsewhere.
Cutting your ties to the state can be fraught with traps for the unwary. It must be done with forethought and done correctly or the state auditors (and there are many) can challenge the tax position you are taking.
We all know the bright-line test: that you must live 183 days or more in a state to call it your resident state but what many do not appreciate is the several other factors that demonstrate the “intent” of the taxpayer. These factors can weigh heavily on winning or losing your case with the state you are moving out of. Your domicile is much more than just the number of days in the state and is impacted by many other facts that demonstrate you have moved for good and don’t intend to return.
Of course, the first thing we recommend is that you keep a calendar of your days in and out of state. Remember, days commuting are days in Massachusetts, even if leaving on a flight at 5 am in the morning. The biggest challenge we often work on with clients is trying to cut physical presence to the state. For instance, let’s say you purchased a $1.5 million home in Florida that you plan on staying at. You also have a $3 million house in Wellesley and want to keep it to come back in the summer, or you have a summer house in Chatham with the same intent. This can potentially be ok, but if you have doctors, businesses, friends, or even family in Massachusetts and move back to the state for five months, have you really moved out of the state? Those auditors will look at the intent of the moveas well as other facts to determine whether you are no longer a resident. As I tell clients all the time, you must line up all your ducks in a row to succeed. You must try to get as many factors as possible for the State to look at your side of the argument. Tax professionals often refer to changing residency of your state as using the Teddy bear test: where your teddy bear is at night and the place you really think of as home.
The list of items to demonstrate a new state of residency is long. These can include registering your car, registering to vote, changing all your mailing addresses for your mail, banking and investment accounts, or finding doctors and joining social or membership clubs in the new state. These are all factors that are looked at heavily during an audit. The more you can establish and demonstrate you have a new life in the new state, the better off you will be. This will show the intent is real.
Something that will not work in your favor when moving out can be renting a home or new residence out of state without selling your property here in Massachusetts or coming back to the state in a few years. Also keep in mind the state, “Big Brother”, can track your movements easily these days. Finally, you need to plan accordingly and not move in a hurry. The last thing you want to do is move 30 days before you sell your company in Massachusetts, thus trying to avoid Massachusetts taxes. That would be a red flag to anyone. The questions around moving your domicile are endless. In order to be done properly, you need to make sure you work with your KN+S Advisors and your other professionals to make sure your situation is sound. Give us a call if you have any other questions or are considering a move.
Jeffrey Solomon, CPA, is the Managing Shareholder at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our professionals, please contact our office at 781-453-8700.