State Residency Planning for Tax Purposes

Why State Residency Matters for Investors

State income tax rates range from 0% to 13.3%, creating annual tax differences of $10,000 to $150,000+ for high-income investors and retirees. California's top rate of 13.3% applies to income above $1 million. New York's top rate reaches 10.9% plus New York City's 3.876% for city residents. Moving residency to a no-income-tax state can save 10-14% annually on investment income, capital gains, and retirement distributions.

State residency planning requires understanding two distinct legal concepts: domicile (your permanent home) and statutory residency (meeting day-count thresholds). Many investors assume physical relocation automatically changes tax residency. It does not. States aggressively audit residency changes, particularly for high-income taxpayers leaving high-tax jurisdictions.

Domicile vs. Statutory Residency Rules

Domicile

Domicile is your permanent legal home where you intend to remain indefinitely. You can have only one domicile at a time. Domicile does not change automatically when you move; it requires both physical presence in a new location and the intent to make that location your permanent home.

Courts evaluate domicile based on objective factors:

• Location of primary residence
• Voter registration and driver's license
• Vehicle registration
• Where you file resident tax returns
• Location of banks, doctors, and professional advisors
• Religious and social organization memberships
• Where your will names as domicile
• Location of valuable personal property

No single factor determines domicile. Courts weigh the totality of circumstances. An investor who moves to Florida but keeps a New York home, maintains New York voter registration, and returns to New York for six months annually may fail to establish Florida domicile despite spending more time in Florida.

Statutory Residency

Statutory residency creates tax obligations based on physical presence thresholds, regardless of domicile. Most states use a 183-day rule: spending 183 or more days in a state makes you a statutory resident subject to that state's income tax.

Key statutory residency rules by state:

New York: 183+ days plus maintaining a permanent place of abode (maintained and available for 11+ months). Even a small apartment qualifies. Staying in a friend's available room potentially creates statutory residency if you exceed 183 days.

California: 9 months (approximately 270 days) or any presence if you enter with intent to reside. California uses a "facts and circumstances" test that includes where you spend the most time, location of spouse and dependents, and where you conduct personal business.

Massachusetts: 183+ days. Massachusetts aggressively pursues telecommuters who worked remotely for Massachusetts employers during COVID-19.

New Jersey: 183+ days plus maintaining a home. New Jersey also taxes nonresidents on income from New Jersey sources.

States can claim you as both domiciliary resident and statutory resident simultaneously if you split time between states. This creates potential double taxation, though most states offer credits for taxes paid to other states.

No-Income-Tax States

Nine states impose no tax on ordinary income:

Washington's capital gains tax: In 2022, Washington enacted a 7% tax on capital gains exceeding $262,000 annually ($524,000 for married couples filing jointly). This applies to sales of stocks, bonds, and other capital assets. Gains from retirement accounts, real estate, and certain small business sales are exempt.

New Hampshire's dividend tax: New Hampshire taxes dividends and interest at 3% through 2026, declining to 2% in 2025 and 1% in 2026 before full elimination in 2027.

For an investor with $500,000 in annual taxable income including $200,000 in capital gains, the tax difference between California (13.3%) and Florida (0%) equals $66,500 annually. Over a 20-year retirement, this compounds to $1.33 million in tax savings before considering investment returns on those savings.

Documentation Requirements

States auditing residency changes require extensive documentation. High-income taxpayers (generally $1 million+) who leave high-tax states face particular scrutiny. Build a comprehensive file before changing residency.

Essential Documentation

Physical presence records:

• Calendar documenting daily location with addresses
• Credit card and bank statements showing transaction locations
• Cell phone records showing tower pings by location
• E-ZPass and toll records
• Flight itineraries and boarding passes
• Passport stamps for international travel

Legal documents reflecting new domicile:

• Driver's license from new state (obtain within 30-60 days of move)
• Vehicle registration in new state
• Voter registration in new state
• Will and trust documents naming new state as domicile
• Updated safe deposit box location

Financial accounts:

• Bank accounts at institutions in new state
• Brokerage account address changes
• Professional advisor relationships (CPA, attorney) in new state
• Insurance policies with new state address

Personal connections:

• Religious organization membership in new state
• Social and professional club memberships
• Medical and dental providers in new state
• Pet veterinarian records

Maintain these records for at least four years after the tax year in question. Many states have extended statutes of limitations for residency audits, particularly New York, which can audit six years back.

Audit Triggers and Red Flags

State tax authorities target specific patterns suggesting incomplete residency changes:

High-value exit patterns:

• Large capital gains realized within 2-3 years of claimed residency change
• Sale of business or company exit creating liquidity event
• Retirement with large IRA or 401(k) distributions

Inconsistent behavior indicators:

• Children enrolled in schools in former state
• Spouse remaining in former state for extended periods
• Maintaining primary residence in former state
• Employment continuing with former state employer
• Social media posts showing extensive presence in former state

Documentation failures:

• Delayed driver's license change (more than 60 days after move)
• Continued voting in former state
• Professional licenses maintained exclusively in former state
• Tax returns filed as resident of former state after claiming residency change

New York's audit program specifically targets taxpayers who claim Florida residency while maintaining New York apartments. Auditors have used credit card records to document coffee purchases, dry cleaning visits, and gym attendance in New York.

California's Franchise Tax Board has pursued departed residents for years after relocation, seeking evidence that California remained the taxpayer's domicile.

Worked Example: Establishing Florida Residency

Situation: Maria, a California resident, sells her technology company for $10 million in capital gains. California would tax this at 13.3%, creating a $1.33 million state tax liability. Maria wants to establish Florida residency before the sale closes.

Timeline:

6 months before sale:

• Maria purchases a Florida home as her primary residence ($1.2 million)
• Applies for Florida homestead exemption
• Obtains Florida driver's license
• Registers vehicles in Florida
• Registers to vote in Florida

5 months before sale:

• Transfers banking relationships to Florida branches
• Establishes relationships with Florida CPA and estate attorney
• Joins local professional organizations
• Updates will to name Florida as domicile
• Sells California home or converts to rental property

Ongoing documentation:

• Maria maintains daily calendar showing location
• Limits California presence to under 45 days annually
• Avoids maintaining "permanent place of abode" in California
• Documents Florida-based medical appointments, social activities

3 months before sale:

• Company sale closes while Maria is Florida resident
• Capital gain excluded from California taxation
• Maria saves $1.33 million in state income tax

Risk factors Maria avoided:

• Did not rush the residency change to occur days before sale (pattern suggesting tax motivation)
• Sold California home rather than keeping it available
• Limited California presence well below 183-day threshold
• Established comprehensive Florida connections beyond minimum requirements

Common Pitfalls

Pitfall #1: Inadequate time before major transaction Changing residency weeks before a large capital gain or business sale creates audit risk. States may argue the residency change was a sham transaction solely for tax avoidance. Establish residency 6-12 months before major liquidity events when possible.

Pitfall #2: Maintaining former state residence Keeping an apartment or home available in your former state, even rarely used, can trigger statutory residency if you exceed day thresholds. Either sell the property, convert to non-residential use, or structure ownership through an entity that eliminates "permanent place of abode" status.

Pitfall #3: Inconsistent document trail Using an old driver's license, maintaining former state voter registration, or keeping professional licenses exclusively in the former state undermines domicile claims. Update all documentation consistently within 60 days of residency change.

Pitfall #4: Spouse or family remaining behind If your spouse or dependent children remain in the former state, courts may find your domicile unchanged. Both spouses should relocate and establish new state connections.

Pitfall #5: Ignoring statutory residency Even with proper domicile change, spending 183+ days in a high-tax state recreates tax liability as a statutory resident. Track days carefully using calendar documentation.

Planning Checklist

Before relocating:

• Calculate potential tax savings from residency change
• Review day-count thresholds for current and target states
• Plan timing relative to major income events
• Identify property to purchase or lease in new state

Within 30 days of move:

• Obtain new state driver's license
• Register vehicles in new state
• Register to vote in new state
• Establish bank accounts in new state

Within 60 days of move:

• Update will and trust documents to name new domicile
• Transfer brokerage account addresses
• Establish relationships with local CPA, attorney
• Join social, religious, or professional organizations

Ongoing:

• Maintain daily location calendar
• Limit presence in former state below statutory threshold
• Keep all travel records (flights, tolls, credit cards)
• File new state resident tax return
• Document local connections (doctors, gym, restaurants)

Before major transactions:

• Confirm residency established at least 6 months prior
• Review documentation completeness
• Consult with tax advisor on audit risk
• Consider obtaining private letter ruling if available

State residency planning requires meticulous documentation and genuine lifestyle changes. Paper compliance alone will not survive audit scrutiny. The tax savings justify the effort for high-income investors, but success requires treating residency change as a comprehensive life transition rather than a tax filing exercise.