Key tax questions to consider before moving
If you’re thinking of relocating, consider the following questions before you leave your current home:
Q. Will I save money if I move to a different state?
A. The short answer is: It depends. You’ll need to work through comparisons of all sorts of numbers, including state and local income taxes, sales taxes, state level estate or inheritance taxes and real property taxes. You also need to consider the cost of living and travel to family or your old location. Tax rules differ by state, sometimes in very small but meaningful ways.
Q. Do I pay income tax in both states if I own homes in two places, such as a primary home and a vacation home?
A. Essentially, you must pay income tax in the state that you consider your permanent home. That can only be one state. Auditors also consider other primary factors, such as where you conduct business, how much time you spend in each location, where you keep the items that are most important to you, and where your family lives. Secondary factors that are also considered include the address where your financial statements and bills are sent, the location where your car is registered, and where you are registered to vote.
After your domicile is decided, it must be determined whether your connections to other states are significant enough to be considered taxable. The answer often depends on how much time you spend in the state. For example, if you are domiciled in one state but also have a permanent home in a second state, where you spend more than half the days of the year, you could be considered a “statutory resident” of the second state. That means you would be subject to income tax on your entire income in the second state. Consult an attorney to understand the tax implications where you live and where you want to go.
Q. If you own homes in different states, are you more likely to be audited by those states?
A. Simply owning homes in two different states does not increase your chance of being audited. What might trigger a potential audit is a change in your residency status in one of the two states. For example, in your last year of paying income taxes in a certain state, you will be required to a file a part-year resident tax return. That’s when a state might notice you are moving your domicile.
You must declare the date on which you moved out of the state and changed your domicile. In some instances, that’s relatively clear. In other cases, it could be a bit more complicated. For example, if you decide to change your domicile to your existing vacation home in another state but you retain the original house as well, you’ll need to know the date on which you made that change if you are audited.
You will also be asked questions about the size of each home, their value, and whether you are still doing business in the original state.
The key is to prepare for a potential audit early, which means before you file your last tax return in a state. It’s important to save your records to ensure the process goes smoothly. That includes bills, cell phone records and records of any moving expenses. You’ll need to demonstrate that you actually moved your possessions to show that you changed your domicile.