By: James McGurren, CPA, CFP®
If you’ve ever thought about moving to Florida, you’re certainly not alone. Many affluent New Jersey residents have considered both the financial and lifestyle benefits of relocating to the Sunshine State.
The idea may seem especially appealing at this time of year — when not only are we facing several more weeks of winter, but we’re also preparing to file our tax returns. New Jersey has some of the highest state income taxes in the nation, while Florida residents pay no state income tax at all, including capital gains tax. However, changing your residency is no small task. The taxing authorities are aggressively auditing taxpayers who change their domicile and the burden of proof, by clear and convincing evidence is on the taxpayer.
Establishing Florida Residency
If you do decide to move to Florida and would like to take advantage of the lower tax rates, it’s critical to make sure that you establish official residency in the state. To do so, you must meet specific criteria that establishes your domicile in Florida, not New Jersey.
The legal term “domicile” requires that you not only have a physical presence in a state, but that you also intend to make the state your permanent home. While you may have more than one home, you can only have one domicile at any given time. Once you’ve established your domicile in a particular state, this will continue until you move to another state with the intention of changing your permanent home.
Even if you move to a new location (such as Florida) for an extended period of time, this does not automatically change your domicile, especially if you intend to return to your original domicile (such as New Jersey) for the majority of the year. In this scenario, you would remain a resident of New Jersey for income tax purposes and be required to pay New Jersey state income taxes.
Note: If New Jersey is your domicile, you are considered a resident for tax purposes unless:
- You did not maintain a permanent home in New Jersey
- You maintained a permanent home outside New Jersey and
- You did not spend more than 30 days in New Jersey
The determination of domicile is based on long-standing common-law principles that can be somewhat subjective. According to case law, “the test of intent with respect to a purported new domicile (depends on) whether the place of habitation is the permanent home of a person, with the range of sentiment, feeling and permanent association with it.”
If you are claiming your domicile in a new state such as Florida, you’ll need to spend at least 183 days a year there and be prepared to provided evidence showing as much, should you ever face a residency audit. Auditors may examine credit card charges, ATM activity, cell and landline phone records, EZ-Pass toll records, travel documents and other such activity to ascertain where you’ve been in the course of the year. State tax authorities examine several key factors in determining a taxpayer’s true domicile, including:
1. Use of homes — If you retain a residence in New Jersey but move to Florida, are you using your Florida home in a way that suggests it is your permanent home? For example, what actions did you take to remove yourself from your old community, and have you established roots in your new community?
2. Employment and active business involvement — What is the pattern of your primary employment and compensation? And if you remain actively involved in a business after you move to Florida, where is the business’ primary office located and where do you work on a day-to-day basis?
3. Time spent in homes — Simply put, in which state do you spend most of your time? Auditors may determine the ratio of days spent in Florida vs. New Jersey — the larger the ratio, the better your case for domicile in Florida.
4. Location of “near and dear” items — In which home are the items most important, or “near and dear,” to you located? The value of these items — which are defined as “personal items that enhance the quality of lifestyle” — can be sentimental or monetary.
5. Location of family members — Auditors will look mainly at which state your spouse and minor children live in, paying especially close attention to where minor children attend school. On some occasions, they may also look at where parents, siblings or other family members live as well.
You may notice that none of these factors consider things such as where you’re registered to vote, where your vehicles are registered, or in which state you hold a driver’s license. While it’s important to make these and other changes when establishing a domicile in Florida, they’re usually considered secondary, rather than primary, factors when state tax authorities perform residency audits.
Statutory Residency Test
Even if you are successful in establishing your domicile in Florida, you could still be considered a New Jersey resident for state income tax purposes if you fail the statutory residency test. According to this test, you could be subject to state taxation in New Jersey if you maintain a permanent residence in New Jersey and spend more than 183 days in this residence during one calendar year.
A permanent residence is a place of abode that is livable throughout the year. (So, a hunting cabin without heat or running water wouldn’t qualify.) You must also maintain the abode as a residence for yourself — pure ownership of the property is irrelevant. And the residence must be maintained for “substantially all of the year,” which is defined as longer than 11 months.
Take This Seriously
New Jersey state tax authorities take the issue of residency very seriously and perform many residency audits each year. Remember, the burden of proof falls on the taxpayer so it is important to document where you spend your time, I recommend keeping a diary, or using an app such as Tax Bird, Monaeo, or TAXDAY to track your time so you won’t lose credit for unidentified or undocumented days.
In general, it’s important to think holistically about where you want to live and where you’ll be happiest. If you think that moving to Florida could be right for you talk to your advisor to ensure you understand all of the financial implications. If you don’t have a financial advisor and are interested in learning more about working with one, call us at (973) 525-1000 or send an email to email@example.com.