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How to Ensure Your House Move is Legal

Last update on: Nov 02 2017

Moving is becoming harder than ever. I’m not referring to the significant expense and work needed to transport your goods from one home to another. That hassle and cost could be a drop in the bucket.

The real problem is convincing the different states involved that you really have moved. Because of aggressive and contradictory positions taken by different tax departments, too often people find themselves being assessed taxes by two or even three states.

The issue today is different from what it was in the 1980s and 1990s. Back then, states sought taxes from long-time residents who changed residences at retirement. The states sought to tax part of their pensions using the theory that the money was earned in their states, but payment was deferred. Income taxes should be paid to the state where the money was earned, they said, even if it isn’t paid until decades later as a pension. Congress added a law to prevent the states from taking this position.

Now, a state will assert that someone has not really moved to another state, and it will assess income and estate taxes based on full-time residence. Or, when someone buys property in a second state, the second state claims the person is a resident and assesses taxes on all the income and property of the individual.

You aren’t safe if one of the states involved does not have an income or estate tax. Sales and use taxes are charged on all the purchases of residents of a state, even if the purchases are made in another state. Buy a car or boat outside your home state, and both states might say you owe sales or use taxes.

People who move to another state, or who own property in more than one state, need to manage their affairs to avoid double or even triple taxation.

The double state tax trap arises because each state decides whom it will tax, and the rules can be contradictory.

Some states tax residents. Others tax domiciles. There is a legal distinction between the two terms, plus each state decides how it defines the terms.

Tax status is certain when a state uses a hard line rule. The most common of these rules holds that anyone who spends more than 183 days in the state (i.e, more than half the year) is a resident of the state. The state imposes its income tax on all income, sales tax on all purchases, and estate tax on all property owned by that person. Spend less than 183 days in the state and taxes are imposed only on income earned in the state. Sales taxes are imposed only on purchases in that state, and estate taxes are due only on property in that state.

Other states, usually those that tax based on domicile, have a more subjective standard. They will look at a range of activities and decide which state the individual intended to be his or her permanent domicile.

You can see how, with these different rules, it is possible for two or even three states to conclude that an individual is fully taxable by each.

Perhaps worst of all, a state can spring this trap after you are gone. The big pay off for many states is its estate or inheritance tax. When you no longer are around to testify and help gather evidence, the states can swoop in and assert their claims.

Taxpayers can protect themselves and their heirs from this trap.

Know the rules. There is no substitute for learning how each state determines who owes it taxes. If a state uses the 183-day rule, you know how to establish the tax status you want in that state. For the states that are more subjective, get a list of the factors each will consider. Some states list the factors in their tax codes. Others have had the factors developed by court decisions and regulations. You might need to consult with a tax or estate planning expert to get a complete list. Our web site, in the Checklists section, has a list of generic factors used by most states.

Count days. No matter which rule a state uses, the days spent in each location are a factor. Keep records of where you spend each day. You can keep a journal, make notations on a calendar, or use some other method. Even this can get tricky. Some states say any part of the day spent there counts as a day, especially if you spent money in the state. Others do not count travels days and half days.

Make the move. States with a subjective test often require you to completely sever ties with them to avoid taxes. Drivers’ licenses, auto registrations, voter registration, and church and club memberships all must be changed. A state might not consider the move permanent if memberships are switched to inactive or associate status instead of being resigned or transferred. Some states also expect you to give up professional licenses in their states.

Major sticking points for many people are real estate and businesses. You need to sell all residences in a state to sever ties. If you want a place to return to in a state, at a minimum you should downsize. Sell the old house and buy a smaller one. Or rent a new place instead of keeping the old one or purchasing a smaller one.

States that use a subjective test generally say that if you are involved in a business there, you have not left the state. To leave these states, you have to sell the business or at least become a passive investor. A business owner needs to consult with a tax or estate planning expert to learn how a state will establish residence status.

It is not a good idea to leave behind valuable items – such as jewelry, furs, and art. Many states consider that leaving valuable items in the state, even in storage, is a significant contact that triggers taxation.

Don’t play games. Don’t leave gray areas or inconsistencies that allow a state to assert you are resident there. A common mistake is to keep a boat or vehicle registered in the old state because the property taxes or registration fees are lower there. Another frequent mistake is for someone to tell the state he is a passive investor in a business but assert active investor status on the federal income tax return where it can result in big tax savings. Another bad ploy: Tell an insurance company you are resident in one state because premiums are lower for its residents, but tell the state you are resident elsewhere. These actions could trigger fraud penalties in addition to a tax bill.

State tax departments are more aggressive than ever, especially in states that are losing residents. With lower federal taxes, state levies are relatively more significant than they used to be. Don’t give a state an incentive to troll through your telephone, credit card, and other records. Let the state auditors think there are greener pastures elsewhere by clearly establishing your residence.

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