Tax Planning, Trust & Estate Planning, Financial Planning

There’s No Place Like Home: Avoid these pitfalls when changing your tax domicile.

July 25, 2023

By: Kimberly I. McCarthy, Esq.​,
Senior Vice President and Chief Wealth Client Services Officer

As you set goals and develop your personal wealth story, where you live matters for many reasons, including taxes. The tax domicile and residency rules – which are imposed state-by-state and vary widely – are more important now than ever. These rules may be familiar to “snowbirds”, but also impact those with hybrid or remote working situations, and those transitioning to retirement, who may live, work, and spend significant time in multiple states. Taking control of your tax “home” can save thousands (or even millions) of dollars in combined state income and estate taxes. But it’s not as simple as a new address, and requires expert advice and advance planning.

Income Tax Implications

In addition to warm weather, it is no secret why many folks retire to Florida: no state income tax. Florida may not be part of your retirement goal, but state income taxes can have a huge impact on the success of your financial plan.

Seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Residents in New Hampshire pay tax only on dividends and interest earnings, while residents in Washington state only have their capital gains income taxed if they are in a high enough bracket.i

In contrast, the new 2023 Massachusetts Millionaire’s Tax—which taxes an additional 4% on income over $1 million—has motivated some to flee the state (including Boston Celtics forward Grant Williams, who recently turned down a Celtics offer and moved to the Dallas Mavericks in part because of the new surtax).

Estate Tax Implications

Estate tax laws differ significantly from state to state. Some states don’t have any estate, inheritance, or gift taxes; some allow a large portion of an estate to pass free of state tax; some have a very low threshold.

Eleven states (Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington) and the District of Columbia impose an estate tax. Six states (Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania) impose an inheritance tax on recipients of inherited assets. Maryland imposes both.ii

Note: if you change residency for estate planning reasons, you also should review your estate plan with your attorney and wealth advisor to ensure your existing documents continue to be enforceable and comply with the laws and regulations of your new home.

The Key: Successfully Establishing Residency

To a large extent, which state’s income and estate tax laws apply depends on residency.

Most states will consider you a resident for tax purposes if you spend 183 days or more in that state. If you spend significant time in another state, or even have another residence there, you need to clearly prove your status to avoid double taxation issues.

Examples of evidence required to establish a new residency/domicile include:

  1. Record of time spent within each state (per the 183-day rule)
  2. Voting records and updated voter registration
  3. Transfer of driver’s license and vehicle registration
  4. Establishment of professional services (e.g., bank, brokerage accounts, lawyers, doctors)
  5. Change of mailing address
  6. Purchase or lease of residence and other property (e.g., car, boat)
  7. Declaration of residency in legal documents, including wills
  8. Volunteering with and supporting charities in the state
  9. Memberships in clubs and organizations in the state
  10. Movement of what is “near and dear” to you (e.g., family, pets)

Washington Trust Wealth Management is Here to Help

If you’re considering moving to a new state for any reason, your first move is contacting your wealth advisor and accountant in the state in which you currently live. At Washington Trust Wealth Management, our experienced and knowledgeable wealth advisors take you step by step through the planning process, helping you navigate the complex state rules and potential income and estate tax implications (and opportunities!) of changing residency. Careful planning now can help you avoid unintended and costly consequences later. For 223 years, the forward-looking team at Washington Trust has helped our valued clients plan and prosper. It would be our privilege to help you.

i Federation of Tax Administrators (FTA). "2022 State Individual Income Tax Rates - January 1, 2022."

ii 17 States With Estate Taxes or Inheritance Taxes ( AARP Published March 09, 2022/Updated March 21, 2023

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This material is presented for informational purposes, and nothing herein constitutes legal, accounting, or tax advice. Please consult with an attorney or tax professional regarding your specific financial, legal or tax situation.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.