The migration of taxpayers from high-tax states to lower-tax states has been ongoing and has intensified during the pandemic, prompting high-tax states to aggressively pursue individuals who have moved away to impose income and estate taxes on them. This has led to a rise in residency audits conducted by tax departments in high-tax states to investigate whether individuals who have moved out of the state have truly changed their residence for tax purposes. These audits often involve sending questionnaires to individuals asking about their lifestyle, residence, and property ownership, as well as reviewing public records and social media sites for evidence of continued ties to the state.
To avoid being subject to taxes in two different states, individuals who are contemplating a move need to be prepared for a potential residency audit and ensure they have sufficient documentation to prove that they have established a legal residence in the new state. This may involve making significant lifestyle changes, severing ties with the old state, and accumulating evidence to demonstrate the permanence of the move. Professional help is often recommended to navigate the complexities of residency rules in different states and ensure that all actions are consistent with the intention to make a permanent move.
High-tax states have different rules for determining residency status, with some states imposing taxes based on the number of days spent in the state, while others focus on an individual’s domicile. Domicile is determined by the intention to maintain a permanent residence or abode indefinitely, with factors such as property ownership, professional licenses, club memberships, and other ties to the state taken into consideration. Individuals must be careful to eliminate or reduce significant contacts with the old state to avoid being considered domiciled there, including transferring memberships, changing licenses, and refraining from leaving valuable property in the old state.
Maintaining detailed records and documentation is crucial to defend against a residency audit and ensure that one’s estate is not subject to tax claims after passing away. States may also employ tactics to retain tax dollars through estate and inheritance taxes, making it important for individuals to plan ahead and take steps to establish their new residency status clearly. It is also essential to ensure consistency in actions and statements across all areas, such as insurance policies, vehicle registrations, and business investments, to avoid any discrepancies that could lead to a residency audit or tax claims against the estate. City and county income taxes may also come into play for individuals moving between jurisdictions.
