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How Domicile Is a Wealth Factor When You Retire to Another State
If you are considering retiring to a state other than where you currently live, understanding where you are a legal resident is critical to mapping out your financial plan. There are two key elements to residency: your domicile and where you actually spend your time. Understanding these concepts impacts where you pay income tax and other personal financial matters.
Domicile, also called your "state of legal residence," is your true, fixed, permanent home. It is the place where you intend to return when you are away. Even if you have more than one home, you will have only one domicile. You do not apply or register anywhere; it is based on facts and circumstances.
Your domicile is the first factor that determines your residency. If you are domiciled in a state, you are a resident of that state. Therefore if you are trying to change your residency, know the facts and circumstances that drive your state of domicile and put them in place as soon as possible.
Your domicile affects the following:
- Your liability for state income taxes
- Your eligibility for certain state benefits, such as in-state tuition rates, disability benefits, and Medicaid benefits
- The jurisdiction where your will is probated
There are two residency requirements: you must be physically present in the state, even though you aren't mandated to be there for a specified length of time; and you must aim to make the state your permanent home. Some states have an exception to the physical presence requirement. If you marry a person domiciled in another state, you may be able to claim your spouse's state of domicile as your own, even if you never go there. Because the intent to reside in any state is subjective, only you can know your true intentions. Your actions and conduct can demonstrate to others whether you have shown intent. The U.S. Supreme Court has suggested to other courts that are deciding on domicile issues to consider the following factors:
- Current residence
- Voting registration and voting practices
- Location of spouse and family
- Location of personal and real property
- Location of brokerage and bank accounts
- Memberships in churches, clubs, unions, and other organizations
- Location of your physician, lawyer, accountant, dentist, and stockbroker
- Place of employment or business
- Driver's license and automobile registration
- Payment of taxes
Additional factors to include:
- Where you spend the most time with family and friends
- Citation in wills, testaments, and other legal documents
- Location of safe deposit boxes used for family records and valuables
- Location of your autos, boats, and/or airplanes and their registrations
- Location of the items that you consider near and dear (jewelry, family heirlooms, works of art, etc.)
- Telephone services at each residence, including the nature of the listing, the activity, and the service features
- Relative size of the home in your new domicile versus your home in another location
Things to do to establish legal residence:
- Change your permanent address to the new state and use it for every form you fill out.
- Stop claiming any benefits to which you were entitled in your former state of residency.
- Sell your former residence in the other state. If you want to maintain a place to stay where you used to live, consider leasing or purchasing a smaller residence than the one in your new state.
- Maintain records of where you spend your time during the year.
- Register to vote in your new state.
- Transfer your vehicle titles and get a driver's license in the new state.
- Establish bank accounts in your new state.
- Update your estate planning documents to reflect your new state of domicile.
Income tax return considerations
In addition, for income tax purposes, most states have rules based on specific statutory criteria whereby you are considered a "resident" if you have been physically present in the state for a certain number of days (often greater than 183 days) and/or if you own a place of abode in their state. You can meet the test for residency in dual states by having a domicile in one state but meeting the statutory rules for residency in another state.
Your income may be taxed in your state of domicile, the state where you earned it, or both. If you relocate on a date other than January 1, you will probably have to file part-year income tax returns in both states if they both have income taxes. In some states, if you're physically present for a certain period of time, you're liable for income taxes in that state regardless of domicile. The most important point to remember when claiming a state as your domicile is to be consistent. Inconsistency is the single biggest mistake you can make regarding domicile.
Any state will take you. It's the state you are leaving that doesn't want to give you up.
If you want to change your domicile, be prepared to convince the authorities of any state that may be negatively affected by your move that you have truly changed your state of legal residence. For instance, if you move from a state with income and/or estate taxes to a state that doesn't have those taxes, you may be asked by your former state to prove that you have legitimately changed your domicile. The state will review the quality and not the quantity of your facts and circumstances to determine the validity of your claim. Most states aggressively audit a change in residency when you are leaving a state that imposes income tax and moving to a state that does not. These audits require you to provide extensive documentation on your whereabouts, including detailed credit card bills, bank statements, travel logs, and cell phone bills.
While residency is a factor when considering your retirement, think broader and compare the overall tax scenarios of the states for domicile consideration. In addition, review the gift, estate, and inheritance taxes. But in no case should taxes be the sole motivating reason. Focus on what you can control in retirement, and think about your health and the health of your spouse, your finances and financial commitments, and your desired lifestyle. If your new location does not address these three areas of concern, then you should consider your alternatives.
How we can help
The residency rules are complex and this issue is often contested by state taxing authorities. If a move is part of your retirement plan, know the factors involved with changing your state of residency and the time it takes to put it all in place. Contact your advisor to understand these rules and review your plans.