Engage with your team of advisors to ensure the tax benefits of a successful relocation.
By Neil Shapiro, TAG Associates Managing Director, Head of Family Office Services
We all know clients, friends and family members who are considering a move to another state. Most aspects of the relocation process are straightforward, including buying a new house, hiring movers, changing your driver’s license, and registering to vote. But not everything about relocating is simple. Some parts require extensive planning, namely, changing your tax domicile — where you are considered a tax resident.
According to The Tax Foundation, individual income tax revenue represents approximately 40% of state government revenue. New York State alone lost more than $24 billion of state adjusted gross income to tax filers leaving the state in 2021, according to data from the IRS cited by the Wall Street Journal.
When an ultra-high net worth family leaves New York, for example, The New York State Department of Taxation takes notice. An auditor from New York will almost certainly be one of your out-of-town guests.
Changing your tax residency is more than just living somewhere for “six months plus a day.” When you plan to change your state residence, questions of domicile and statutory residency must be carefully considered. According to New York State law, if you are either domiciled in New York or a statutory resident of New York (even if domiciled in another state), your global income is taxed by New York.
A Mix of Art and Science
Your tax domicile is where your home is. It is a subjective determination and open to interpretation. In other words, the “art” of a state tax analysis. In New York State for example, auditors look at several factors, including where you go after you’ve been away on vacation, where you and your family spend time, where your work is, and where you keep sentimental “near and dear” items.
The key to moving your tax domicile is supporting why you relocated. That is where the art of storytelling comes into play. Skilled advisors can help you craft a relocation story and generate a to-do list of actions to support that story.
Some examples advisors recommend include:
- Retitling, possibly to a third-party trust, and leasing back the home in your departing state (the “Old Home”) as compared the new home you purchased as part of your relocation (the “New Home”).
- Transferring from the corporate office near your Old Home to one near your New Home, or perhaps opening a new office near your New Home.
- Spending more time at the New Home relative to other places you stay, including significant holidays. A change from your historical travel pattern is a good idea.
- Leaving or joining boards of local organizations and supporting local philanthropic groups near the New Home.
- Joining a local house of worship near the New Home.
Statutory residency is independent of your domicile and is less open to interpretation, but also leaves you subject to state taxes. It is determined purely on the facts, i.e. the “science” of an analysis. In New York there are two requirements for statutory residency: maintenance of a permanent place of abode and spending more than 183 days in New York.
As with domicile planning, experienced advisors can review your fact patterns and proactively identify areas you could be exposed to statutory residency. The tracking of days in New York is often the most complicated and labor-intensive element of supporting you are not a New York resident. To support our day count analysis, we use an audit-accepted technology solution called Moneo to actively track your location. Frequent communication with your advisors and proactive planning are key to crossing a bad threshold that can otherwise be avoided.
The Best Defense is a Good Offense
Residency audits happen after you have already moved, and your facts are locked into place. Further, the burden of proof is on the taxpayer to demonstrate the change of domicile. As such, ultra-high-net-worth families should utilize their financial advisors and attorneys to quarterback the change of domicile effort and put together a long-term game plan to ensure that tax regulators are kept at bay.
The devil is in the details to avoid technical foot faults. For example, you may hang art in the new home, but neglect to update your property insurance schedule location; you may keep a detailed location diary (physical or digital) but fail to plan ahead or review the data regularly with your advisors before exceeding 183 days in New York; you may be living apart from your spouse but as a couple you still maintained a permanent place of abode in New York.
A successful change of domicile and avoiding becoming a statutory resident in your previous state is possible. But working with your expert advisors is essential. Together, you will craft a narrative that is supported by individual evidentiary facts. Each piece of evidence is not enough on its own, but combined they can make the story too compelling for tax regulators to counter.