Changing domicile from a high-tax state to a low-tax state
A growing trend has emerged: a mass exodus of people from high-tax states to low-tax states.1 In recent years, states such as California, New York, and Illinois have seen significant outflows of population, including entrepreneurs, small business owners, and the like, who, among other things, are seeking more favorable tax environments to grow their wealth and achieve their financial goals. These individuals are drawn to states such as Florida, Texas, and Nevada, which offer lower tax rates and, many times, a more business-friendly environment.
This exodus is being driven by a combination of factors, including lifestyle considerations and the rising cost of living in certain states, but it is undoubtedly exacerbated by the increasing burden of state and local taxes. For example, California’s top marginal individual income tax rate in 2024 is 13.3%, the highest in the nation, while Florida imposes no individual income tax. Similarly, the estate tax rates in New York, Massachusetts, and Rhode Island can be as high as 16%, while Nevada and Florida have no estate tax at all. As a result, many people, including those of high net worth, have an incentive to change their legal residence to states that offer more attractive tax structures, which can have a significant benefit to their bottom line.
This article explores the benefits of moving to a low-tax state and the issues that arise if that move is scrutinized by a state’s taxing authority.
Why it matters
A person’s resident status can have significant implications for state tax purposes. Forty-one states and the District of Columbia currently impose broad-based individual income taxes on both residents and nonresidents.2 Eighteen states and the District of Columbia also impose estate and/or inheritance taxes, and one state, Connecticut, also imposes a gift tax.
For individual income tax purposes, residents are taxable on their worldwide income, regardless of the geographic source of the income. Conversely, nonresidents of a state are subject to a state’s income tax only to the extent that the nonresident derives income from sources within that state. Similar rules apply for state estate and gift tax purposes as well.
While there is no uniform definition of the term “resident” for these purposes, each of the states imposing individual income taxes defines it to include individuals who are domiciled in the state. A similar rule generally applies for state estate tax purposes, such that a decedent’s entire estate can be subject to a state’s estate tax, regardless of where the assets are located, if the decedent was domiciled in the state on their date of death.3
Many states also utilize a second test for tax residency based on statutory criteria such as maintaining an in-state abode and spending more than 183 days per year in the state. This is often called a “statutory residency” test. While time spent physically in the state is important for domicile as well, multiple additional factors come into play for domicile that are not relevant to statutory residence. Interestingly, a taxpayer can end up being considered both a domiciliary of one state and a statutory resident of another state, which can result in their being taxed on their worldwide income in both states — and having to hope that one state will allow a credit for tax payments made to the other state. This article does not delve into these dual-taxation issues.4 The focus here is on the requirements to change one’s domicile.
The law of domicile
“Domicile” is generally defined as “the place at which a person has been physically present and that the person regards as home” as well as a person’s “true, fixed, principal, and permanent home, to which that person intends to return and remain even though currently residing elsewhere.”5 It is the place with which a person “is most closely associated.”6 Note, however, that “domicile” is not synonymous with “residence” in this context. Indeed, a person can have only one domicile, although they may have multiple houses or residences.7
To accomplish a change of domicile, two basic requirements must be met: (1) physical presence at the new location, coupled with (2) an intention to remain there indefinitely or, at minimum, the absence of any intention to go elsewhere.8 Otherwise stated, “Domicile is manifested by physical presence plus intent.”9 Generally, intent is therefore the “controlling factor” in any domicile case.10
An established domicile continues until a new domicile is acquired.11 This is sometimes referred to as the “leave and land” rule, under which a person seeking to change their domicile must not only leave their existing domicile but also land in the new one.12 This requirement forecloses a person from changing their domicile via a temporary stay in a new state.
An existing domicile is presumed to continue until a change is shown.13 When the location of an individual’s domicile change is challenged, the law places the burden of proof on whichever party has alleged the change.14 One common misconception, discussed below, is that a change of residency can be accomplished by simply changing one’s driver’s license or executing an affidavit of domicile in the new state. Any person seeking to change their state of domicile must consider how they will demonstrate that they both “left” their old state and “landed” in a new one in order to meet this burden of proof.
What specifically must be shown to demonstrate a change of domicile?
Initially, the party asserting a domicile change must demonstrate that there has been a meaningful “change” sufficient to accomplish a change of domicile.15 Courts and tax authorities examine “certain objective criteria” to assess whether a person’s “general habits of living demonstrate a change of domicile.”16 This is “primarily a question of fact, but the elements to be considered in locating a domicile present a question of law.”17 The underlying motive for the domicile change is immaterial so long as there has been a bona fide change.18
As noted earlier, the individual’s intent is always paramount in disputed domicile cases. But since we cannot read a taxpayer’s mind, a proponent of a domicile change “must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct.”19 While approaches for determining intent vary widely from state to state, most states use a substance-over-form approach. This means that realities of the individual’s day-to-day life following the change are weighted far more heavily than so-called paper changes such as merely obtaining a driver’s license or registering to vote in the new location. For all intents and purposes, the individual’s life in the new location should essentially replace the life they previously led in the former location.
Many states focus on five primary factors — time, homes, business connections, family, and possessions — to evaluate a reported domicile change. This approach entails a comparison of the individual’s connections with respect to each factor in the new location versus the former location. Consideration is given to whether the individual’s ties are stronger to the new location or the former location. The stronger the ties to the new location, the greater the likelihood that the individual’s new domicile will be respected.
There is, however, considerable misinformation out there. Probably the main one that we hear in our practices is the concept of “six months and a day,” with some clients having been told that all they need to do is spend six months and one day in the new state, in order to effectuate a domicile change.20 This is untrue, particularly when, as in most states, the law requires that the party proving the domicile change do so by a “preponderance of the evidence” or by the heightened “clear and convincing evidence” standard. Merely spending 51% of the year in the new location, without more, is unlikely to satisfy either evidentiary standard. Equally unavailing are situations where the steps taken are limited to the “paper changes” noted above. In almost all states, ministerial acts alone will not establish a domicile change. While these are nonetheless advisable steps that should not be overlooked, the realities of day-to-day life are the main focus.
The following summarizes the issues examined under each of the five primary domicile factors:
- Time: This factor compares the amount of time spent at the new location versus the former location following the reported change. Ideally, the individual will spend considerably more time in the new location. There is also a qualitative aspect that considers where the individual spends important days, such as holidays, birthdays, and anniversaries.
- Homes: This factor compares the individual’s residences in the new location versus the former location, with consideration given to the nature of the individual’s use of each residence. If the individual has sold or otherwise disposed of their residence in the former location, this factor will strongly favor a change of domicile to the new location. But this factor can also favor the new location even if the individual retains a residence in the former location, particularly if the residence in the new location is significantly larger, more valuable, used more, or otherwise more suitable to the individual’s current lifestyle.
- Business connections: This factor considers the location of the individual’s active business ties at the new versus the former location. Typically, passive activities are omitted from the analysis. For instance, mere ownership of rental real estate in the former state does not create ties under this factor.
- Family: This factor reviews the individual’s familial ties at the new versus the former location. In most cases, the review centers on immediate family members — specifically, the individual’s spouse and minor children — and, while some taxpayers may attempt to establish a domicile in a different state than their spouse, this can be very difficult to prove since most auditors assume that happily married couples live together and share a domicile.
- Possessions: This factor looks to the location of the individual’s most prized possessions. The focus should be on items with sentimental value such as family heirlooms, rather than on items with considerable financial value, although the two may not be mutually exclusive. Moreover, items with higher intrinsic value, such as jewelry or a collectible antique car, tend to create a paper trail (e.g., moving records, insurance documents), which may not exist for other items, such as family treasures, even though these items carry the highest sentimental value. Keep in mind that many states consider pets to be “possessions” for purposes of this factor.
In addition to updating one’s formal declarations of residency, such as driver’s licenses and voter registrations, care should be taken to ensure that any residency-based benefits in the former location are relinquished. This includes real property tax exemptions for a primary residence, residency-based parking tax exemptions, resident fishing/hunting licenses, and even resident memberships to clubs. The individual should also establish relationships with medical providers and other professionals in their new location. In sum, the new location should become the individual’s personal headquarters, and all significant life events should revolve around the new location to the extent possible. For instance, an individual taking an overseas trip should try to depart and return from airports in their new state rather than the former state. The idea is that most people return “home” at the conclusion of a long trip.
How taxing authorities find you
The law discussed so far in this article takes on particular importance to those facing, or concerned about facing, an audit related to their change in resident status. Many states have ramped up their audit and enforcement efforts in this area in recent years, particularly the higher-tax jurisdictions impacted by COVID-19 and post-COVID-19 migrations, with no end in sight. At the same time, tax authorities are increasingly relying on more sophisticated methods for selecting audit candidates, with the goal of targeting their resources to cases that are more likely to enhance the public fisc. The following triggers can increase the likelihood of being selected for audit:
- Filing an individual income tax return that reflects a change in resident status (e.g., the first part-year or nonresident return);
- Filing a nonresident return that reports a high number of days spent in the former state, particularly when the return also discloses in-state living quarters;
- Failing to disclose in-state living quarters on a nonresident tax return;
- Continuing to claim residency-based benefits, such as local licenses or property tax exemptions, after reporting a residency change;
- Filing a nonresident return that reports a significant difference between the federal income and the in-state income;
- Continuing to list the former address on tax documents, including tax returns as well as tax forms (Forms 1099, K-1, W-2, etc.);
- Past audit history, specifically when the taxpayer’s resident status was disputed;
- Audits of related parties, partners, ex-spouses, etc.; and
- Whistleblowers and bad publicity.
Changing one’s domicile
Lower tax rates can be one reason to relocate one’s legal residence to a different state. But taxpayers need to understand the requirements to achieve a change of domicile so they recognize the practical lifestyle implications of such a decision and can avoid issues with state and local taxing authorities.
Footnotes
1See, e.g., “The Great Blue to Red State Migration Continues,” The Wall Street Journal (editorial) (Dec. 22, 2023); Loughead, “Americans Moved to Low-Tax States in 2023,” Tax Foundation (Jan. 9, 2024); U.S. Census, State-to-State Migration Flows (tables).
2Seven states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — impose no individual income taxes whatsoever. New Hampshire’s tax, known as the interest and dividends (I&D) tax, is levied only on income from interest and dividends and is scheduled to be repealed in 2025.
3See, e.g., Conn. Gen. Stat. §12-391(d)(1)(E); Haw. Rev. Stat. §236E-2; and Me. Stat. tit. 36, §4102(10).
4For more on dual taxation, see van Steenbergen, “Teleworking and the Dual-Taxation Dilemma,” 52 The Tax Adviser 295 (May 2021).
5Black’s Law Dictionary (11th ed. 2019).
6Id., quoting Weintraub, Commentary on the Conflict of Laws §2.2, at 14 (4th ed. 2001).
7See Texas v. Florida, 306 U.S. 398 (1939); In re Newcomb’s Estate, 192 N.Y. 238 (1908); DeBlois v. Clark, 764 A.2d 727 (R.I. 2001); and Coudert, “Some Considerations in the Law of Domicil,” 36 Yale Law Journal 949 (1927).
8See In re Welton, 448 B.R. 76 (Bankr. M.D. Fla. 2011); In re Capps, 438 B.R. 668 (Bankr. D. Idaho 2010); Catlett v. Catlett, 869 N.W.2d 368 (2015); and Delgado Ortiz v. Irelan, 830 F. Supp. 68 (D.P.R. 1993).
9DeBlois, 764 A.2d at 737.
10Id. at 734.
11Dupuy v. Wurtz, 53 N.Y. 556 (1873); Swartz v. Commissioner of Rev., No. C287671 (Mass. App. Tax Bd. 4/1/10).
12See Kelly, “Coast-to-Coast Residency Issues: New York and California,” 28-2 J. Multistate Taxation and Incentives 8 (May 2018).
13See “Establishment of Person’s Domicile,” 39 Am. Jur. 2d Proof of Facts 587 (April 2024 update), citing Davidner v. Davidner, 304 Minn. 491 (1975); Powers v. Kelley, 83 Ill. App. 2d 289 (1967); In re Estate of Daniels, 53 Wis. 2d 611 (1972); Hamlin v. Holland, 256 F. Supp. 25 (E.D. Pa. 1966); and McDougald v. Jenson, 786 F.2d 1465 (11th Cir. 1986) (recognizing this rule under Florida law).
14See Davis v. Cannon, 242 So. 2d 291 (La. 1970); Michaud v. Yeomans, 115 N.J. Super. 200 (1971) (requiring proof “by a preponderance of the evidence”); and In re Estate of McKinley, 461 Pa. 731 (1975) (requiring “clear and satisfactory proof, to overcome the presumption that the old domicile remained”).
15See Ingle v. Tax Appeals Tribunal, 110 A.D.3d 1392 (N.Y. App. Div. 2013).
16 In re Biggar, DTA No. 827817 (N.Y. Tax App. Trib. 2/24/19).
17Swartz v. Commissioner of Rev., No. C287671 (Mass. App. Tax Bd. 4/1/10).
18Duff v. Beaty, 804 F. Supp. 332, 336 n.4 (N.D. Ga. 1992), citing McDougald v. Jenson, 786 F.2d 1465, 1481 (11th Cir. 1986) (“Motive as to why a party moved is immaterial, provided the move is bona fide.”); 13E Fed. Prac. & Proc. Juris. §3613 (3d ed.) (“Any person sui juris may acquire a new domicile at any time and for any reason”); Restatement (Second) Conflict of Laws, §18, comment “f”).
19 In re Simon, DTA No. 801309 (N.Y. Tax App. Trib. 3/2/89) (slip op. at 6, internal citation omitted).
20This mistaken belief may result from confusing domicile and statutory residency.
Contributors
Ariele R. Doolittle, Esq., is partner, and Mark S. Klein, Esq., is partner and chairman emeritus, both of Hodgson Russ LLP’s offices in New York. Klein presented on this topic at AICPA & CIMA ENGAGE 24 in June 2024. For more information on this article, contact thetaxadviser@aicpa.org.
AICPA & CIMA MEMBER RESOURCES
Articles
Bly and Waldnig, “Wealth Migration and Change of Domicile,” 55-8 The Tax Adviser 22 (August 2024)
van Steenbergen, “Teleworking and the Dual-Taxation Dilemma,” 52 The Tax Adviser 295 (May 2021)
Podcast episodes
“Changing Domicile in Today’s Environment,” AICPA PFP Section podcast (Nov. 20, 2020)
“The Unexpected State Tax Consequences of Employees Who Work From Home,” AICPA PFP Section podcast (Oct. 6, 2022)
Tax Section resource