Residents of high-tax states, such as New York, New Jersey, Connecticut, California, or Illinois, are seeking to minimize state taxes by moving to states with no income tax (or estate tax), such as Florida, Texas, Washington, or Nevada.
It’s happening in record numbers. Thousands of high earners left New York in 2020, for example. Many more are considering it. Remote work lets people work from anywhere and they’re increasingly moving away from high-tax states.
If you’re thinking of joining the movement or using another home as a way to avoid paying state taxes, you really need to read this first.
It’s Not Just Six Months and a Day
You’ve probably heard this along the way: just change your drivers license and leave your home state for six months and an additional day (183 days), and you’re no longer considered a resident. Sadly, it’s not true. There’s much more involved.
Before you make the move to paradise, know that you’ll likely face a residency audit and the burden of proof is on you. Because of the mass migration and a state level debt crisis, states are being more aggressive at investigating and auditing those that claim they are no longer state residents.
COVID and Migration Have Led to Major Debt
Because of high taxes and the high cost of living, nearly half of those earning six figures in NYC said they’re considering leaving. More than 400,000 left the state were moving from NY in March and April 2020 alone.
It creates a huge problem for major cities like New York. People earning more than $100,000 make up 80% of the city’s income tax revenue, accounting for 22% of the city’s overall tax revenue. When you add in debt for dealing with the COVID pandemic, it’s a financial crisis. The states seeing these losses are struggling.
NY Governor Andrew Cuomo has repeatedly blamed “wealth flight” as one of the causes of the state’s multi-billion-dollar revenue shortfall.
High-Income Earners Will Get Audited
As cities and states struggle to replace that lost income, they’re being increasingly aggressive in pursuing those claiming a change of residency. If you make $100,000 or more annually, your chances of facing a state residency audit are nearly 100%.
New York conducts more than 3,000 non-residency audits each year and has collected more than a billion dollars over the past few years. More than half of the people audited lose. It’s an expensive loss. In 2018, the average amount of back-taxes paid from a failed audit was $273,000.
The Domicile Test and Statutory Residency Test
Auditors analyze domicile residency as a baseline test. They’re more interested in whether you have permanently moved rather than if you’ve spent six months away.
Auditors will examine two items closely:
The Statutory Residency Test
The Domicile Test
While each state may have its own litmus test, we’ll use New York as a benchmark. They’ve been auditing the longest and have the most case law in this area.
In general, the Statutory Residence Test considers someone a NY resident if they have a permanent living space in the state that is “suitable for living year-round.” While you can have multiple residences, if you have a permanent “place of abode” in the state and spend more than 183 days of the year in New York, you’ll be required to pay state taxes.
The Domicile Test looks at where your home really is. A change of domicile doesn’t mean spending six months and a day in your winter home in Florida and getting a second country club. In an audit, you would have to prove your intention to abandon your NY domicile and make your new location your principal residence.
Unlike criminal court where you’re innocent until proven guilty, it will be up to you in an audit to prove you have indeed undergone a change of residency. Auditors have been known to look at social media, cellphone records, dental and health records, credit card bills, voting records, auto registrations, and even vet bills to deny a change of domicile. In one case, auditors did an in-home visit to look inside a refrigerator to check for food.
Mitigate Your Risks
We’ve only scratched the surface of the rules. There are detailed and complex. Before you make a move, you need to understand the playing field to prepare for an imminent audit. The Six Months and a Day platform automates the audit trail and provides a simple solution to changing domicile to a no income tax state.
Take the SixMAD Audit Risk Quiz and see your likelihood of passing and inquire about our white- glove concierge service to ensure your smooth transition.
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