Tax Planning

Experts highlight the tax issues every financial adviser should know

Changing state residency: Tax planning headaches and opportunities

Residency rules can be very complicated, and states can be aggressive in taxing former residents

May 16, 2017 @ 5:40 pm

By Tim Steffen

When it comes to tax planning, the federal income tax receives the lion's share of the attention, and rightly so. But what about state income taxes? State tax rates vary wildly around the country, with California leading the charge with a top marginal rate of 13.3%. On the other extreme, seven states have no income tax at all.

As a result of this variance, the executive you advise who is transferring to a new location or the retiree you work with who is looking for the perfect place to live should be familiar with the residency rules and how income is allocated between states.

(More: Retirement taxes are not for sissies)

CHANGING RESIDENCY

Determining residency is important, as that state will then be able to tax all income for that taxpayer, regardless of whether it's earned working in another state or even country. Therefore, taxpayers should take as many steps as possible to establish their new residency — and, at the same time, sever their old residency. While each state has their own rules on what makes someone a resident of their state, there are many commonalities.

The main requirement is to establish a domicile. This is the place you intend to remain indefinitely, or return to whenever you're away. For someone who rotates among various homes during the year, states will typically claim you as a resident once you spend 183 days there, although that does vary by state. Oregon uses 200 days, for example.

Beyond establishing a domicile, states will look at many other factors to determine whether you created, or severed, residency. Some of the more common factors include obtaining a driver's license, registering to vote, getting a library card or joining a church or club. The new state isn't likely to argue you're not a resident, so these steps are often more necessary to prove to the former state that you no longer live there.

(More: These investments could do well under Trump tax plan)

PART-YEAR RESIDENCY

The 183-day requirement is one that often confuses people who are changing states mid-year. Meeting that minimum number of days is important when there are multiple potential residences. However, individuals don't need to be in a state for 183 days before establishing residency. Residency is established in a new state as soon as a new domicile is set, along with the other factors identified above.

Any income earned as of the date of the move is now taxed to that new state as opposed to the former state, and a part-year resident tax return is filed in each state. This return typically includes a schedule showing total income and the portion allocated to that state. Investment advisers can provide the needed details for interest, dividends and capital gains, but taxpayers should keep careful records to allocate other income and deductions. In some cases, a simple pro ration is the only option.

NON-RESIDENT TAXES

Even though a taxpayer may have moved to a new state, it's possible to maintain tax-ties to the old one. Rental income from the former home while it's waiting to be sold is a common scenario. In that case, the income is taxed to the former state where the property is located, as well as the current state, which taxes your total income regardless of location. That new state will usually offer a tax credit to eliminate any double-taxation, and taxpayers typically end up paying whichever state charges more. Consultants, directors and others who often travel for work are probably familiar with the need to file in multiple states.

(More: 10 most missed tax deductions)

Residency rules can be very complicated, and states can be aggressive in taxing former residents, especially those recognizing large amounts of income right after a move. As always, it's important to encourage your clients to keep good records to accurately document the timing of a move and income.

Tim Steffen is director of financial planning at Baird. Follow him on Twitter @TimSteffenCPA.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

When can advisers expect an SEC fiduciary rule proposal and other regs this year?

Managing editor Christina Nelson and senior reporter Mark Schoeff Jr. discuss regulations of consequence to financial advisers in 2018, and their likely timing.

Recommended Video

Path to growth

Latest news & opinion

Fidelity charging new fee on Vanguard assets held in 401(k) plans

The 0.05% fee is ostensibly a response to Vanguard's distribution model, but may also make the company's funds less attractive due to higher cost.

UBS adviser count continues to decline

Firm to merge U.S., global wealth management units on Feb. 1

TD Ameritrade launches all-night trading for ETFs

Twelve funds now can be traded after-hours, but the list will grow, company says.

Cutting through the red tape of adviser regulation is tricky

Don't expect a simple rollback of rules under the Trump administration in 2018 — instead, regulators are on pace to bolster financial adviser oversight.

Bond investors have more to worry about than a government shutdown

Inflation worries, international rates pushing Treasuries yields higher.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print