Snowbirds often own two homes — one up north where these retirees spend the warmer months and one down south in colder ones.
When one of those homes is in a high-tax state and the other is in a low-tax state, you want to establish residency in the low-tax state if possible because all your income will be taxed by your state of residence. But the bar for claiming residency is often higher than snowbirds think. And certain states have a reputation for vigorously challenging flimsy claims.
Fortunately, though, there are some things you can do in advance to demonstrate your residency status in case it ever raises an eyebrow. If the high-tax state tries to tax you as a resident, here’s what it will consider and how you can prove that you’re a resident of the low-tax state:
Where you spend the most time. Many states have a “183-day rule,” which means you’re taxed as a resident if you own a home there and spend at least 183 days a year in the state. The obvious way around this rule is to spend most of your time in the low-tax state where you’re trying to establish residency. Keep a record of where you are each day in case the high-tax state picks you for a residency audit and hang on to receipts for expenses you incurred in the low-tax state to help document your time there.
The state government that knows you best. Where you’re licensed, registered and insured is an important part of establishing residence. To that end, you’ll want to get a driver’s license and register all your vehicles in the low-tax state. Call your insurance company and have your vehicles covered there, too.
Once you get your driver’s license, you can also register to vote in the low-tax state — and you should actually vote there to help show that you consider it your primary home.
When it’s time to pay your federal income taxes, use the address in the low-tax state. If it has an income tax, file your return for the state as a resident. If property tax exemptions or other special tax breaks are available to residents of the low-tax state, make sure you claim them. This is all evidence that can help you build your case if your residency status is ever questioned.
The professionals you see. When you need a doctor, dentist, lawyer, accountant or other professional, pick one in the low-tax state. That will help convince a tax auditor that your life is based there. It’s fine if you occasionally see a specialist somewhere else, but your regular doctor — or any other professional that you consult — should be in the low-tax state.
The institutions that handle your finances. Where you keep and manage your money also says a lot about where your true home is. The smart move is to put your money in a bank in the state with lower taxes. It can be a national bank, but there should be a branch close to your home where you can do your banking in person. All bank statements should also be sent to your address in the low-tax state. Do the same for all your financial activities. Start working with brokers, financial planners, insurance agents and the like in the low-tax state.
Rocky Mengle is tax editor at Kiplinger.com. For more on this and similar money topics, visit Kiplinger.com.