by Chris Bixby, CFP®, EA
Senior Vice President
Portfolio and Wealth Management
Every year, we get questions about how to reduce taxes by moving out of state. Taxes in Oregon have been some of the highest in the country for many years, and Washington is quickly following suit. With the imposition of an estate tax, capital gains tax, and now the proposal of a head-count tax, the state of Washington has gone from among the friendliest to the least friendly states for taxation. Residents of these two states, as well as other higher-tax states, are continually confronted with the question as to whether they should leave the state and live in a more tax-friendly environment.
Before we jump in, it is important to realize that there are no clear rules for what constitutes moving states for tax purposes. Each case is seen as a “facts and circumstances” test that must stand on its own. This subjective analysis adds a level of uncertainty and complexity, which means that you should always consult with legal professionals before you undertake a move.
It is also important to keep in mind that a change of residence and change of domicile are two different things. A change of residence could happen by merely purchasing and living in a home in another state, but that would not necessarily mean that a change of domicile has happened. A domicile is not only where one has a residence, but it is the place where one has a substantial connection and an intent to remain. Importantly, taxes are imposed on the basis of domicile, not the basis of residence.
Six Months and One Day
The first step in changing domiciles is to establish a physical presence. This commonly means living in your new state for more than 183 days. Note that we did not say “stay out of your old state for 183 days”. Generally, you must reside in the new state for more than six months each year to establish a change of domicile. And, as mentioned earlier, you must reside in the new state with the intent to remain in that state.
If you are likely to avoid a major tax impact in your old state by moving, it is recommended that you keep clear records of which dates you spend where. Apps exist that can help you track your movements, as cell phone records and credit card statements have been used to establish the location of a taxpayer on specific days.
To show the subjective intent of forming a new domicile, actions beyond mere presence in a new state will be necessary. This may include actions such as updating wills, voter registrations, drivers’ licenses, auto registration, banking statements and any other legal documents that reflect your new state of residence. All of these legal documents may help show that you are intending to change domicile, not just residence.
Intent to Leave Permanently
To change domicile, you must also have a subjective intent to leave your state and not return. This does not mean leaving for three years, selling a business and then returning after taxes are paid. Courts have looked unfavorably on fact patterns that indicate there was always an intent to return. When a client keeps the option open to return to their original state, courts may hold that there was no intent to permanently leave, and as such, there was a change of residence but not a change of domicile.
When considering the factors that will show your subjective intent to move your primary residence to another state, it is helpful to be mindful of the practical choices that will indicate to others that you are treating the new property as your home. If you intend to retain a residence in the place of your former domicile, moving all personal items (family pictures, heirlooms etc.) to the new house that you purchase may help show intent. Selling your primary residence will also make it clear that there is no intent to return. However, if you do keep your old primary residence, you should consider a purchase of a comparable or better residence in your new state, and you may also consider converting your former residence into an income-producing property. Leaving your old home intact is considered strong evidence of an intent to return.
Other items that show intent are those that highlight engagement with your community. Switch golf clubs, change houses of worship, change hairdressers, join new civic organizations and volunteer in your new community. These are all clear signals that you are moving your life to a new location permanently, and that your intent is to be a part of your new community and not merely living a snowbird lifestyle. In short, if your objective is to create a new domicile for tax purposes, it can be a risk to take partial steps to leave your old community behind and only partially engage in your new community. If challenged, you will be asked to show that your intent was to leave your life in your old state and fully establish a full life in your new state.
Conclusion
The steps toward changing domicile are complex and based on a combination of factors. If your intent is to move out of a state for tax purposes and then return, there is a risk that taxing authorities or courts will find that the subjective intent necessary to establish a new domicile did not exist, and thus taxation will be appropriate by the state that remained your domicile. As such, it is highly recommended that you consult with your attorney and accountant before considering a change of domicile.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.