Posted by The TaxAdvocate Group, LLC

How To (Successfully) Establish a New Domicile to Save Taxes

How To (Successfully) Establish a New Domicile to Save Taxes

The Tax Cuts and Jobs Act, or TCJA, was expected to simplify tax filing and reduce tax bills for millions of American workers. However, according to new data from the IRS (Internal Revenue Service), Americans paid an additional $93 billion in personal income taxes in 2018 compared to their taxes in 2017. 

Many of the taxpayers most affected by these increases in tax debt live in states with higher taxes, such as New York, California, New Jersey, etc. In view of taxes, people have looked for other ways to minimize their current tax obligations. Getting out of a high tax state is one way to help you pay less income tax.


What is a Domicile?

The term "domicile" refers to the place where a person (or a couple) maintains their permanent residence and the place to which they intend to return. Okay, a permanent change doesn't necessarily mean death, but it doesn't involve more than one visit for a long vacation.

Imagine the professional athlete who has their primary residence in a state and a second home next to the team playing for that season. To establish domicile, most states will need two main elements: 

  1. An actual residence (house, home, apartment, condominium) 

  2. The intention to stay indefinitely. 

While it is likely for an individual to live in more than one place, they may have only one address. Moving between homes does not automatically change your domicile unless you take additional steps to make your new home your permanent residency.

When a domicile is established, it will remain so until the person moves to a new location and permanently changes it.

When you change a domicile, there are many steps that you need to take to make sure that you have sufficient evidence that you have moved to a new state. It is even more mandatory to follow these steps to establish a new domicile when moving from a high tax state, such as California or New York, to a low tax state. Spending just 183 days in your vacation home in a low-paying state won't automatically qualify you for a new domicile.

Those who choose to skip these steps may receive involuntary state income and even estate tax. Also, you may have to pay other fees associated with a state tax audit, which can be annoying, time-consuming, and costly.

Here are some steps to take when trying to establish a new domicile.

  • Change your address: It might sound obvious, but trust me, it isn't. Use your new address as your mailing address whenever possible. The minimum is to use the new address on state and federal income tax returns. Register and pay taxes owed in your new state and avoid filing and paying taxes in your old state. Indicate your new state as the address on all forms and documents that require you to list a residence. 

  • Cut business ties with the old state: This option mainly applies to entrepreneurs who own one or two businesses. If you are the owner of a national company, it is not necessary to limit your activity to a single state. On the other hand, if all your income comes from the previous domicile, you will have to work harder to prove that you no longer live in the previous domicile.

  • Find a job in the new state: Working in a new state is one of the best ways to prove that you live there. This can be more difficult if you work remotely or have multiple sources of income. That being said, do your best to establish that the new state is where you are working. It is almost as important to show that the work was NOT done in the previous state.

  • Maximize the time spent at the new address: Sure, take a vacation wherever you want, but do your best to spend as much time as possible in your new domicile. Also, do your best to avoid spending too much time in the old state. Your travel diaries, your phone usage, and even your bills can be used to prove some of these things.

  • Register to vote for your new state: You must register to vote in your new home state for all future local and national elections. To go further, it is necessary to know where the political contributions are made. Make your contributions to the politicians of your new state rather than your old state.

  • Send a declaration for the establishment of a domicile: Some states, such as Florida and Nevada, will allow you to file a self-declaration with the clerk's office, which declares you a resident of the state. It might seem like stress to you, but it is another way to prove that you are living in your new domicile.

  • Update your estate plan: Updating your living trust is one way to show you've moved, and I would probably only recommend them to seniors or individuals in the highest tax category. Real estate planning is hard enough, but rebuilding a real estate plan for a new property can be overkill, especially if you don't expect to be there all the time.

  • Update your licenses: Yes, going to a new state might be a nightmare for you, but transferring your driver's license to the new state is necessary. You should also update your auto registration to the new state. Go ahead and update your professional licenses as well.


Final Words

Paying taxes might be a daunting task for you. You will be able to pay much less tax when you establish a domicile in some of the low-tax states. Of course, you can earn a lot less if you live in poor condition. However, if you end up moving to another state, be sure to follow as many of these steps as possible to avoid the hassle of a state tax audit. Also, engage the services of a tax professional to help you figure out what options are best for you.


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