Considering Changing Your Domicile? The Four Fundamentals to Successfully Changing Your Domicile

Changing your residency for tax purposes, or “domicile,” to Florida, Texas, or one of the other five income tax-free and estate tax-free states can significantly reduce your tax burden, but only if you successfully terminate your domicile in your current state.

In order to successfully change your domicile, you should understand and apply the following four fundamentals:

It is the State You Are Changing From That You Should Be Concerned About

Each state has its own laws concerning who is considered domiciled in their state for tax purposes. One-size-fits-all checklists and articles are worthless and even dangerous unless they are specific to the state you are changing your domicile from. Yes, you read that correctly! It is the state you are changing your domicile from that will audit you. It is your high tax state that has the most to lose and they do not want to lose another taxpayer!

In fact, domicile is state specific. There is no federal law requiring states to have consistent domicile laws. Instead, state domicile laws vary as much as states’ income tax rates. As a result, you should be most concerned about the domicile laws of the state you are changing from, not the state you are changing to. Florida, Texas, and the other tax-friendly states will not likely challenge your change of domicile, but the state you are changing your domicile from is likely to do so.

The ‘Six Months and a Day Rule’ is a Myth

Many people have heard cocktail party conversations that spending six months and one day in a new state will be sufficient to change their domicile to the new state. The six months and a day rule is a myth!

It is true that many high tax states consider a taxpayer who has a place of abode in their state and who spends more than a certain number of days or nights in their state to be domiciled in that state for tax purposes regardless of their intent to be domiciled elsewhere. But the corollary is not true that to be domiciled in a state the taxpayer must be there for six months and a day. Instead, a “number of days” test is used offensively by many high tax states when they claim that you remain domiciled in their state, but spending less that the specified number of days in their state is not a defense to indicate that you are not domiciled there. Instead, for those states that have a number of days test, passing that test is simply equivalent to passing part one of a two-part test.

The Intent Test Is Like an Apothecary Scale

Many states use some form of a number of days test. All states, including those with no number of days test, use an intent test. If the state you are changing your domicile from would simply ask “is your intent really to change your domicile or are you just trying to minimize taxes,” your answer would be predictable. Instead, each state has identified factors, by statute, regulation, publication, case law or administrative law, believed to indicate a taxpayer’s true intent. It is these factors that vary by state and are essential to know if you intend to successfully change your domicile.

While some indicators of intent carry more weight than others, the best way to think of these factors is by using an apothecary scale analogy. If you were audited and had to stack the various factors on either side of an apothecary scale, one side representing the state you are changing your domicile from and the other side representing the state you are changing your domicile to, which side would weigh more? If you intend to successfully change your domicile, your goal is to be sure that your apothecary scale clearly and unequivocally tilts toward your new state.

You Can Minimize Your Audit Risk

As thousands of taxpayers from financially troubled states depart for tax friendly states, tax auditors are becoming more aggressive. This trend is likely to continue, and you should be prepared in case of an audit. Know the laws of the state you are changing your domicile from and “dot the ‘I’s” and cross the ’t’s’” and you will be in good shape if an audit occurs.

Many state tax audits result from taxpayers triggering the audit by failing to adequately address factors that are within the state government’s purview. For example, many taxpayers change their domicile and yet they still use their secondary residence address in their former high-tax state on their income tax returns. Doing so is extremely likely to trigger an audit. Other taxpayers who maintain professional licenses in a high-tax state do not change their license to non-resident status or use their address in their new state for licensing correspondence. This can also trigger an audit. Similarly, hunting, fishing, recreational, and pet licenses have also been the downfall of many taxpayers.

Minimize Taxes to Maximize Your Legacy

Many of us are concerned about rising taxes, at both the state and federal level. Most of my clients believe that minimizing their taxes gives them more potential to maximize their legacy. If you feel the same way as my clients, by all means, investigate your options. And if you decide to change your domicile, maximize your chances for success by learning the laws of the state your are changing your domicile from.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Brad Galbraith, Esq., CPA, is the managing attorney at Galbraith, PLLC, with offices in Naples, Florida and Indianapolis, Indiana. His practice focuses on providing creative, cutting-edge estate, tax, and business planning advice to business owners and other wealthy individuals. Brad is board certified in Wills, Trusts and Estates by The Florida Bar Association and is admitted to practice in Indiana, Florida, and before the U.S. Tax Court.

Brad is also the legal contributor to changemydomicile.com.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.