Resident for Tax Purposes – A Complete Guide: PillarWM

Wealth managers are financial professionals who can help you manage your finances in accordance with your life goals, financial objectives, and personal circumstances. At Pillar Wealth Management, we offer fiduciary, fee-only wealth management services to individuals and families who have $5 million to $500 worth of liquid wealth. We have more than sixty years of experience assisting affluent investors in planning and managing their taxes, investments, and wealth. If you want to know more about enhancing your financial situation, you can visit our website to schedule a free meeting with us.

Table of Contents
When Are You Required to Change State Residency? How Do I Change My State Residency?    Is Becoming A Resident for Tax Purposes Worth It? Wrapping It Up!

When Are You Required to Change State Residency?

For several high net worth and ultra-high net worth individuals, relocating to a low-tax state is a part of their retirement strategy. This generally happens in California and New York. People prefer to move to a new state once they hit retirement. This is great for them to reduce their losses and secure their wealth.

You might not realize this, but if you have $5 million or more worth of liquid assets, a huge percentage of your wealth will go to Uncle Sam over the years. Why should you pay so much money in taxes when there are plenty of tax-friendly states you can relocate to?

Tax planning can be challenging, especially when you are a millionaire. The objective is to have a clear mind and think rationally while making critical decisions. In our guide here, we share some useful tips and tricks to help you preserve your wealth for a worry-free retirement period.

Regardless of how much wealth you have amassed over the years, sustaining your desired lifestyle post-retirement remains a huge concern. We have authored a book titled The Art of Protecting Ultra-High-Net-Worth Portfolios and Estates – Strategies for Families Worth $25 Million to $500 Million for ultra-wealthy families. You can order your own free hardcover copy and find out how you can secure your wealth to live a comfortable retirement.

With that being said, many individuals are reluctant to relocate to a new state despite higher taxes because they want to stay close to their families. Many times, retirees don’t want to leave their kids and grand kids behind. Thus, they either downsize their primary residence in their state and purchase a condo or a small house in another state.

Now, let’s find out how you can become a resident for tax purposes.

How Do I Change My State Residency?   

From finding professional movers and a new home to making friends and securing a job, moving to a new state can be an overwhelming and confusing experience. While there’s so much you need to do, you have to keep in mind that changing your state residency should be your foremost priority.

Unfortunately, changing your state residency is a complex task requiring a lot more than simply sending more than 183 days in the new state. For instance, you will have to prove that you abandoned your previous state domicile, establish a new domicile, along with plenty of other things.

If you fail to change your state residency, you might have to face the IRS and other government agencies. Not to mention, it can also prevent you from voting, owning a vehicle, and driving in the new location.

To help you out with this complicated procedure, here is a step-by-step guide on what you need to do if you want tochange your state residency.

Step #1 – Determine the State You Want to Move to

Determining where you want to move to is the very first thing you need to do to change your residency. Every state has its own set of requirements and laws for establishing residency. Hence you need to do your homework.

For instance, Texas offers several conducive for in-state tuition, income, and estate planning, as well as no gift or inheritance taxes. Establishing residency in Texas is much easier as compared to other states.

Simply stated, understanding the requirements and laws can help you determinewhich is the best state to move to according to your particular financial circumstances.

Step #2 – Find A New Home

After identifying which state you want to relocate to, you have to find a place to stay there. It doesn’t matter if you rent a flat or buy a home. All you need to have is a permanent address.

Step #3 – Establish Domicile in the New State

If you are wondering, “When did I change my form of legal residency for income tax purposes?”then this is the time you are going to do it.

After you purchase or rent a home in your new state, you will have to establish it as your legal domicile. This helps to prevent you from being taxed in two different states. Some states might require you to complete a “Declaration of Domicile” to declare the new state as your permanent residence.

Step #4 –Change Your Mailing Address

Once you have moved to your new home, you will need to change your mailing address with the US Postal Service, i.e., USPS. On the official website, you will have to choose a date to start forwarding your mail. This step will help establish your residency and ensure that you get all updates and related mail to the correct address.

Step #5 –Apprise Utility Providers Regarding the Change of Address

In this stage, you will have to get in touch with your utility service providers, including your electricity, water, gas, phone, sewer, internet, cable, and security system providers, and apprise them of your new address.

Moreover, you will also have to speak to your insurance provider. It’s highly recommended to shop around and compare plans from various property insurance providers in the new state.

Step #6 – Update the IRS Address

You also have to update the IRS address as soon as possible to prevent any delays in receiving tax refunds and correspondence. You can use form 8822 to update your new information at any time.

Step #7 – Register to Vote

When moving to a new state, you need to register to vote at your earliest. You can call or visit your local town hall for more information on this.

Step #8 Get a New Driver’s License

If you had a valid driver’s license in the previous state, getting another one in the new state won’t be much of a problem. Go through all the requirements before you apply for it. You might have to take your old driver’s license, along with proof of residency, social security card, and other identification documents.

When registering for a new driver’s license, make sure to register your vehicle and get a new license plate too.

Step #9 File for Taxes

Filing for tax returns in your new state is a vital step in becoming a resident for tax purposes. This can be a complicated and time-consuming process, which is why you should speak to a tax accountant or tax advisor to get clarity on this. They can help make the transition a breeze for you and make sure you pay your taxes correctly.

Step #10 Open a New Bank Account

To become a resident for tax purposes, you will have to update your bank account information and credit card billing address soon after the move. You will also have to open a new bank account in the state you’ve moved to.

Step #11 Register Your Pet

If you are relocating with a pet, you will have to register and obtain a license within a month of moving. This will help in ensuring that your pet is inoculated for public safety reasons.

Step #12 Announce Your Relocation

Finally, it’s time to tell your family and friends that you’ve moved to another state! You can simply make a social media post or send out an email to make it official.

Relocating to a new state for tax purposes is a major decision. It can have a huge impact on your life, so don’t make any mistakes. The best way to go about it is by speaking to a financial advisor. They have comprehensive knowledge regarding tax minimization strategies and can help you make the right choice. Find out more about tax-saving strategies by requesting a free copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.

You can also schedule a free meeting with us to discuss if moving to another state is the right option for you based on your present situation.

Is Becoming A Resident for Tax Purposes Worth It?

If you are planning to change residency for tax purposes, you will definitely want to know if it’s actually worth it.

In states that have no income taxes, commercial real estate is quite affordable as compared to states with higher taxes. If you wish to start a business in the new state, you could end up saving thousands of dollars. Coupled with a lower living cost, you can effectively preserve most of your wealth.

Especially for retirement, moving to a low-tax state can be beneficial since you depend on your passive income and savings to cover your expenses instead of an actual income. If you keep sending huge sums of money to Uncle Sam, you will have to sacrifice your living standard.

With capped tax deductions and better economic prospects, states with no income taxes are a great option to lower your tax liability. To be sure that this is the right move for you, you can consult with a competent and knowledgeable wealth manager. Schedule a meeting with us to learn how we can help with your tax management and retirement plan.

What Are the Drawbacks?

As an affluent individual, every choice you make is critical to ensure financial stability and prosperity. For instance, investments are risky, which is why you should get the help of a professional to perform the requisite research and analysis to find out your risk-return ratio. Read our handy guide here, where we discuss the five critical shifts you can make to enhance your portfolio performance.

Likewise, changing residency for tax purposes comes with some risks too. The IRS is frequently conducting tax audits and is particularly interested in affluent investors. The more wealth you have, the higher chances of you getting audited if you try to relocate to a new state for tax reasons.

In addition, relocating to a new state with a low tax rate or no income tax doesn’t always reduce your tax bill. Some states levy exorbitant property and sale taxes to make up for the absence of state income taxes. If you run a business in another state, you can be regarded as a dual resident. Thus, we recommend you work with a tax advisor to navigate through these complexities.

Wrapping It Up!

Knowing how to become a resident for tax purposes is challenging. State residency laws are different and tricky, especially if you are a high net worth or an ultra-high net worth individual. Several states resist a change in residency as they don’t want to lose out on the tax revenue they get from wealthy residents.

Working with a financial advisor is strongly recommended if you want to change your residency for tax purposes. Wealth advisors at Pillar Wealth Management have expertise in assisting clients with $5 million to $500 million. If you want expert guidance from one of our team members, you can set up a free meeting with us.

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