Changing Your Domicile From PA or NJ to FL To Reduce Your Taxes
If you are a Pennsylvania or New Jersey resident and spend a large portion of each year in Florida, you may want to consider making Florida your legal domicile. There are several possible tax advantages to establishing Florida as your legal residence, including income taxes, property taxes, and state death taxes.
Florida is one of seven states which does not have a state income tax. Florida’s Constitution prohibits a state income tax and further prohibits municipalities in Florida from imposing an income tax. Because it would take a constitutional amendment to change this prohibition, it is highly unlikely that you would need to worry about Florida later imposing an income tax after you have established residency there.
The lack of income taxes in Florida can result in significant savings for Pennsylvania and New Jersey residents. Pennsylvania imposes a 3.07% on all income earned by residents. New Jersey’s income tax rate can range from 1.4% to 8.97% on ordinary income and 15% to 20% on capital gains.
However, even if you do establish Florida residency, you may still have to pay New Jersey or Pennsylvania income taxes on any income earned in those states. For instance, you will have to pay New Jersey or Pennsylvania income tax, as applicable, on rental income earned from real properties situated in those states. Additionally, Pennsylvania and New Jersey will tax all wages earned from an employer in those states unless the nonresident’s work must be performed from his or her out-of-state location for reasons other than convenience.
Property Taxes and Homestead Law
Florida offers two distinct benefits concerning your primary residence. If you are a Florida domiciliary, Florida’s Homestead Law protects you from losing your home to a creditor or any other lien holder, except for a creditor whom you granted a mortgage on your property. Similar to Florida’s prohibition on income taxes, this protection is found in the state Constitution and therefore is unlikely to change, as a supermajority of Florida’s state legislature would be required to amend this. While you would already have this protection to a degree if your home was titled as “tenants by the entirety” and the debt only accrued by one spouse, this law does offer significant protections for a single homeowner, who would not be otherwise protected from creditors.
Florida’s Save Our Homes Act also provides property tax benefits to Florida residents on their primary residence. On qualifying property, the assessed value of the real property for tax purposes carries an exemption for the first $50,000 of taxable value for all taxing entities except for the school district, for which a $25,000 exemption is permitted. Furthermore, on homestead property, the assessed value for tax purposes cannot rise more than 3% from one year to the next
State Death Taxes
The current amount that can be given by a person at death tax free of federal estate taxes is $5,430,000 and for a married couple, this totals $10,860,000. Any amount that exceeds the exemption is taxed at a marginal federal rate of 40%. Most Americans will not have an estate subject to Federal Estate Tax but may still have to pay a state death tax. More than thirty states do not have an estate or inheritance tax at all but unfortunately Pennsylvania and New Jersey are not included in that number.
New Jersey has arguably the harshest estate and inheritance tax regime in the entire country. For estates that exceed $675,000, estate tax must be paid and the rate can range from 0.8% to 16% depending on the size of the estate. As of January 1, 2017, the exemption amount will be raised to $2,000,000 and the New Jersey Estate Tax is scheduled to be completely eliminated as of January 1, 2018. Additionally, an inheritance tax must be paid based on the class of beneficiaries you have bequeathed your estate to. For example, children, parents, and spouses are exempt from inheritance tax but transfers to almost everyone else are subject to inheritance tax ranging from 11% to 16%.
Pennsylvania no longer has an estate tax but imposes an Inheritance Tax on transfers to everyone except your spouse. Transfers to lineal descendants (children and grandchildren) are subject to 4.5% tax, siblings are taxed at 12% and everyone else is subject to a 15% inheritance tax rate.
Even if you have an estate that will not be subject to the Federal Estate Tax, you could still save a considerable amount of your estate for your beneficiaries by establishing Florida as your primary domicile. If you have a $5,000,000 net estate in Pennsylvania and you leave everything to your children, your tax bill will be approximately $225,000 and, if you died in 2016, that same estate in New Jersey would pay close to $290,000 in death taxes. If you think your estate will have to pay significant state estate or inheritance taxes, you may want to consider being domiciled in a state with no death taxes such as Florida, especially if you already have a home there.
ESTABLISHING NEW DOMICILE
As noted above establishing Florida as your legal domicile would result in significant income and death tax savings both during your lifetime and at your death. A person can be a resident of several states if they have homes in several states but you can only have one legal domicile. The key is making sure that you meet all the requirements for legally changing your domicile. It is not as simple as buying a house in Florida and spending a few months there during winter.
INTENT TO ESTABLISH NEW DOMICILE
You must have an honest and bona-fide intent to establish a new domicile and give up the other state as your legal domicile. Generally, a domicile is characterized as the place where you intend to make your permanent home and the place where you intend to return to after you have been absent. However, your desire to change your domicile can be for any number of reasons and still qualify as legal intent to create a new domicile. Reasons such as health, business, pleasure, better climate, better laws, or for any other reason whatsoever are sufficient reasons to desire to establish a new domicile. Regardless of why you are choosing to change your domicile, the burden of proof will be upon you or your estate if your new domicile status is challenged.
EVIDENCE OF INTENT TO ESTABLISH NEW DOMICILE
There are several steps that you should take in order to legally establish a new domicile. You should first establish a permanent residence in your new home state. If you own the home you live in Pennsylvania or New Jersey it is also recommended that you should own your home in Florida. Renting an apartment may make it seem like you do not intend to permanently move to Florida. One change to consider is selling the family home in Pennsylvania or New Jersey and downsizing to a smaller home in that state. You do not want it to seem like your Florida home is actually your winter vacation home because it is so much smaller in size than the home you are maintaining in your old state.
If you plan to split your time between the new and old state, you will need to avoid the appearance of intent to continue having your old state as your permanent home. Part of establishing domicile in Florida will be acquiring a new permanent residence there but you also must spend the “majority” of the year there. When assessing whether a person is domiciled in one state or another, tax auditors will always look at the number of days spent in a state. Most states operate under the rule that you are domiciled in their state if you are there for more than 183 days in a year. If you think you will be spending close to half the year in each state, you should keep a detailed calendar of when you arrived in and departed from each state as many states will consider any time spent in their state as a full day toward the 183 days necessary to tax you as a domiciliary of that state. If you are traveling from one state to another frequently, you should also keep records of your travel such as airline reservations or toll receipts.
After securing a residence in Florida you should obtain a Florida drivers license. You should also be sure to name Florida as your domicile in your Will and Trust. Other records that support your domicile status in Florida include:
- Voter Registration Cards;
- Vehicle and Boat Registrations;
- Obtaining memberships in clubs, charitable organizations, and religious institutions in Florida and discontinuing affiliations in the old state;
- Transferring all bank accounts and safe deposit boxes to Florida;
- File income taxes and personal property taxes in Florida;
- Change to non-resident status for tax returns filed in old state for income still earned there;
- Transfer all professional licenses; and
- Find medical providers in Florida.
You may also want to consider having family and social gatherings in Florida and transferring all your valuable items of artwork and furniture to your home in Florida. Furthermore, if part of your decision to move to Florida permanently is for health reasons, you may want to have your physician document that he has given you that advice.
Making all these changes will work in your favor if you are ever challenged on your new domicile on your income tax return or if your Estate has to file an Estate or Inheritance Tax return for property retained in the state of your former domicile. It is more likely that your domicile status will be challenged on an income tax return filed during your lifetime as the old state will likely want to continue taxing all your income instead of just the income earned in that state. If you successfully overcome a challenge to your domicile during your lifetime, you will also likely prevail if there is a challenge on the taxability of your estate as your estate will be able to show that you have been filing income tax returns as a resident of Florida for several years.