By: John P. Napolitano, CFP®, CPA, PFS, MST

A lot has been written and bantered about amongst the snowbird crowd regarding changing their legal domicile to a more income tax friendly state.

You know it’s a hot topic when the major financial magazines all publish their best places to retire, with taxation always one of the driving factors for the winning areas.

While many folks pretty much know the basics, such as leaving a paper trail showing that you indeed spend more than half of your time in that state– that alone isn’t enough. There is new case law that suggests that your trail, and maybe even the more than half your time rule haven’t sufficed in state tax audits.

Starting with the paper trail and your basic proof, you need to change just about everything regarding your address of record. That includes your driver’s license, voting registration, address of record for all financial accounts including but not limited to banks, investments, credit cards and basically everything that asks for your home address.

You may think that you can fudge some of this stuff, but in today’s electronic world that is not advisable.  I can teach your grandkids how to figure out where you were in any given week. All we need are your bank and credit card statements and cell phone bill. Further back up may include heat and electric bills or temporary terminations of service for things like cable TV when not in the former primary residence.

New case law suggests, however, that the old rule of thumb where you spend more than half the year in your new state jurisdiction alone may not do the trick. The tax authorities have moved from the simple facts test and expanded to a facts and circumstances test. The circumstances being where the tax court deems your heart to reside. Before you start the eye roll, let me explain where they are coming from.

The theory here is that people who have a big house in, for example, Massachusetts and a tiny winter home in Florida, that their heart may be deemed to be in Massachusetts. They will look at items such as where you store your most valuable objects. If your jewelry and art are insured in the home in MA, then they will start wondering why you’d leave your most valuable objects in what you claim is your second home. They feel that it stands to reason that the items most near and dear to your heart would be with you in your primary residence where you spend the majority of your time.

The disparity of the two homes isn’t the driving factor, even if the two homes are similar in size, value and creature comforts, this argument of where your heart is may still ensue. This topic isn’t something to take lightly or just wing it. You should have the guidance of competent counsel who has significant experience with these matters. Ask your advisor if they have been involved with domicile audits. If they answer yes, that is a good sign.

 

 

John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.

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