White sand beaches and tax incentives have people turning to the Sunshine State. And not just the traditional retirees—remote workers nowhere near retirement are also considering making the move. Because if you have to socially distance yourself, you might as well have balmy winters to keep you company, right?
But why Florida?
As appealing as warm afternoons on the beach sound with winter here, there are things to consider when it comes to relocating to Florida. What do you need to know before buying a plane ticket?
The Siren Song of Tax Incentives
Many states across the country are currently operating at a deficit and the loss of income taxpayers to greener pastures, so to speak, is driving an increase in those state’s residency audits. By and large, rules haven’t changed but states are getting more aggressive and fewer exceptions may be made than in the past.
Florida is one of the few U.S. states with no state income tax, so it’s no surprise that people from the high-income tax states are among the top relocators. The Tax Cuts and Jobs Act (TCJA) has left some people looking to improve their tax position.
Before the TCJA, individuals in higher-taxed states were able to benefit from State and Local Tax (SALT) deductions on federal income tax forms. But now the TCJA limits the SALT deductions to $10,000 annually. SALT deductions have historically represented big tax breaks for individuals who itemized their Schedule A deductions. For those in high-income tax and property tax states, this has been a big hit.
But to see these tax benefits, one has to officially change their state of residence. For those planning on splitting time between Florida and their previous state, there are a few important factors to weigh—and a few things to watch for.
Where is Your Domicile?
When making the move to Florida, your goal is to establish Florida as your domicile, or your permanent home. The “facts and circumstances” behind your move to Florida plays a key factor when proving that you’re a Florida resident in the event of a state residency audit.
Although you may own more than one home, you only have one domicile. What does that mean? It’s the place a person calls home and intends to reside indefinitely—and whenever the person leaves that home, where he or she intends to return.
Because establishing domicile can be ambiguous at times, states may take a hard look at several factors. They consider the size and nature of use of your home, where is your time spent, your business involvement, your personal connections, and location of items “near and dear” to you.
There are also some additional ways to document your domicile in Florida including filing a declaration of domicile at your county office, obtaining a Florida driver’s license, registering to vote in Florida, and several others.
Moreover, domicile is impacted by your reasons for moving. But domicile is only one piece of the puzzle. Statutory residency may need to be considered.
There’s No Place Like Your Statutory Residency
The nomadic lifestyle is increasingly common. In the U.S., 4.8 million independent workersdescribe themselves as digital nomads according to a report by MBO Partners. Yet if you’re bouncing back and forth between locations, you may risk having the status of “statutory resident” bestowed on you.
Definitions of “statutory resident” vary from state to state. Some states consider you a statutory resident, at least for tax purposes, if you spend more than half the year or 183 days in the state. Some states lack specific rules, but consider someone a resident if the state considers them to be there for more than temporary reasons.
And that statutory residency status could very well come knocking with an unexpected tax bill in hand. More specifically, it can mean being taxed on all your income, including capital gains, dividends, and interest income.
How do you avoid being classed as a statutory resident? Know the rules of your state and follow them carefully.
Real Estate, Estate Tax, and Other Factors to Consider
Establishing a domicile in Florida and establishing residency is a complicated process. Ideally, you can make a clean break by selling all real estate, moving all business activities, and fully investing in your life in Florida by buying a home in Florida. This is the best way to indicate intent to make Florida your domicile.
Along those lines, be cautious of how you handle any real estate sales you may initiate — you want to take advantage of the capital gains exclusion on the sale of your primary residence. To do this, the home you are selling must have been your primary residence for two of the last five years. For example, if you’re selling your New York residence in year five of claiming Florida residency, you would not be able to take the capital gain exclusion since the New York residence would have been your primary residence for only one year in the last five years.
If you choose instead to maintain multiple properties between Florida and another state, you’ll want to keep detailed records of financial transactions and travel plans to document where you have been in the event you are audited by the state.
You’ll also want to consider estate taxes when you’re considering relocation to Florida, especially if you are at or near retirement age. Florida, as you may know, doesn’t have an estate tax, but your current state may. It’s important to update your estate plan to reflect Florida’s laws upon establishing domicile in Florida.
Relocating to Florida may sound dreamy—white sand beaches and tax breaks are a great combination. However, it takes some careful planning and strategy to avoid an unexpected tax bill. Consulting with an experienced tax professional is a helpful step before making any plans.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Connie Eckerle is a member of the Smolin Lupin and a licensed Certified Public Accountant in Florida and Georgia.