Establishing Residency for State Income Tax Purposes

by | Apr 16, 2020 | Business Organizations

It is common knowledge that the state where a person establishes residency, their “domicile”, can dramatically affect their net after tax income. Some states, such as Texas, Florida, Montana, Alaska, and South Dakota have no income tax. Our neighbor state North Dakota has the lowest state income tax of those states that impose a state income tax. Many other states that do have an income tax have a relatively low effective state income tax rate. In addition, many states exempt certain income sources, such as social security payments, military pensions, and retirement plan distributions from their state taxation. Unfortunately, just as very few states have no state income tax, a very few states have an effective income tax rate above seven (7) percent. According to a recent Google search, Minnesota currently has the 4th highest effective state income tax rate behind only California, Hawaii, and Oregon.

Challenging winter weather aside, there are substantial economic reasons for persons concluding their careers to establish a low or no tax state as their domicile for state income tax purposes in retirement. As part of the analysis, remember that some states with low state income tax rates have higher property tax rates and assess sales tax on food and clothing. Minnesota exempts some food and clothing from sales tax.

While a detailed explanation of how to establish a low or no tax state as your domicile for tax purposes is not possible in a short article, there are a few key principles that must be followed:

  1. Live outside the state of Minnesota for at least 183 days each year. The days need not be consecutive. Document where you lived each day of the calendar year.
  2. Do not homestead a dwelling in Minnesota.
  3. Get a driver’s license and license your car in the state where you are spending the majority of the year residing.
  4. Make sure your credit card charges, check cashing, cell phone calls, and similar digitally based traffic, if subpoenaed or otherwise audited by state government, support your statements as to where you live.
  5. Make sure where you are registered to vote, hunt, fish, and the like are in the state where you want as your domicile. Buy an out of state license if you return to Minnesota to hunt and fish with old friends or a family member. Your other social involvements in clubs and or organizations should be re-established in your new state of residence.
  6. Your mailing address should be changed to your new residence.

The above is not a complete list and competent legal and accounting advice should be sought when working through the process of changing your domicile to reduce or eliminate state income tax liability.

This article is not a substitute for legal advice in the context of a specific case. Caldecott & Forro, PLC provides free initial consultations to clients and potential clients on all legal matters.