How Residency in Two States Can Affect Your Taxes

Can you have residency in two states? And if so, is it a smart move from a financial and tax perspective?

The answers to these questions depend heavily on the two states where you are considering establishing residency.

Here’s the critical issue:

For high- and ultra-high-net-worth investors, especially those who own multiple properties across different states, the consequences of getting this wrong can be extremely costly.

The last thing you want is to incur unnecessary taxes that could have been legally minimized or avoided. Understanding how dual-state residency works, including the rules, risks, and benefits, is essential for effective wealth planning.

This article will explore how dual-state residency is treated for tax purposes, answer commonly asked questions, and walk through the pros and cons of living in states with no income tax.

Many wealthy individuals consider moving to a no-income-tax state as a strategic tax planning decision. However, the process can be complex, requiring careful attention to legal and financial details. Working with an experienced professional can help ensure your transition is handled properly and in full compliance with state laws.

Choosing the right approach from the beginning can make a significant difference in preserving your wealth and optimizing your tax position.

What is Dual State Residency?

Your place of legal residency—typically your permanent home—is known as your domicile. When considering dual residency, a resident is generally defined as someone who is present in a particular state for reasons that are not merely temporary or transitory.

However, the specific definition of “resident” can vary widely between states, making the rules complex and sometimes difficult to navigate.

Dual residency occurs when you are considered a resident by two different states, according to each state’s own legal definitions. This situation creates the potential for significant tax complications.

The key issue is that most states reserve the right to tax 100% of a resident’s income, regardless of where or how it was earned, including investment and portfolio income.

If you maintain homes in two states and spend time in each, both states could, in theory, claim you as a resident and impose taxes on your full income.

This situation is known as dual taxation. It can have serious financial consequences and should be avoided through careful planning and informed decision-making.

How is a Change in Residency Established?

How do you establish residency in two states—and how do you legally dissolve residency in a higher-tax state, even if you continue to spend some time there?

Certain factors are used by states to determine your residency status for income tax purposes. These include:

• Where are you employed
• Whether your employment is permanent or temporary
• The location of your business relationships or transactions
• Whether you reside at a property, have rented it out, or sold it
• How much time do you spend in the state
• Where you are registered to vote
• Where your driver’s license or permits were issued
• Memberships in clubs or organizations

Changing your residency is a proactive process that requires planning, consistency, and careful documentation. The more connections you establish in the lower-tax state—and the fewer ties you maintain in the higher-tax state—the stronger your case will be if your residency is ever challenged.

What is the 183-Day Rule for State Residency?

The 183-day rule is often used to determine whether an individual can be considered a resident of a state (or country) for tax purposes. In the United States, the Internal Revenue Service (IRS) uses a complex formula that considers the current year along with the two preceding years when applying the 183-day rule.

In simple terms, if you spend more than 183 days in a particular state, that state may claim you as a resident for tax purposes.

Establishing residency in a new state while maintaining ties to another, especially when employment requires physical presence, can make the process challenging. A common scenario involves someone living in New Jersey but commuting to work in New York. In such cases, spending more than half the year (183 days) in the working state could trigger dual residency obligations and potential dual taxation.

Can You Live in One State and Claim Residency in Another?

The answer depends on how your domicile is defined and how much time you spend in each state. Domicile is typically the place you consider your permanent home—the location you intend to return to after any period of absence.

Claiming residency in a state different from where you physically spend most of your time can be complicated. Every situation is unique, and each state applies its own rules and definitions regarding domicile, residency, and taxation.

Careful documentation, adherence to state-specific regulations, and a thorough understanding of one’s lifestyle patterns are critical to successfully establishing and maintaining the correct residency status.

Can You Have Residency in Two States and Avoid Income Tax?

What options exist to mitigate the challenges of dual taxation? As a high-net-worth investor, protecting your assets and minimizing tax liabilities are key priorities.

One of the most effective strategies is relocating to a no-income-tax state.

States such as Alaska, Florida, Tennessee, Texas, and Washington impose no state income tax, providing an opportunity to preserve more of your earnings. However, for individuals with substantial business interests or travel requirements, maintaining ties to other states can complicate matters.

In many cases, it is possible to file a nonresident tax return in the state where your business operates, allowing you to exempt yourself from being taxed as a resident there.

However, not all states provide this flexibility. Some states are aggressive in asserting tax claims over income connected to their jurisdictions, particularly when dealing with high earners.

This highlights why the specific combination of states where you live, work, and invest matters significantly. Each state has its own rules, thresholds, and interpretations when it comes to determining residency and tax obligations.

Given these complexities, consulting with a knowledgeable professional who specializes in multi-state taxation can be essential to developing an effective residency and tax management strategy.

The Advantages of Having Residency in States with No Income Tax

States with no income tax offer distinct advantages for high-net-worth and ultra-high-net-worth individuals seeking to protect and grow their wealth.

Opportunities in Commercial Real Estate
Commercial real estate, such as office spaces and buildings, often has a much lower cost in states with no income tax compared to high-tax states. Lower living costs and business expenses contribute to this difference. For wealthy investors who own multiple businesses, this can present valuable opportunities to acquire commercial properties at more favorable prices, allowing greater capital preservation and diversification.

Retention of Wealth
High-tax states typically impose taxes not only on income but also on investment returns—often a primary source of wealth for affluent individuals. Elevated tax rates can significantly diminish portfolio performance and reduce overall financial flexibility. Establishing residency in a no income tax state can enable investors to retain more of their earnings and investment growth, supporting long-term wealth preservation and financial goals.

Stronger Economic Environments
States without income taxes often boast stronger economies, competitive job markets, and broader entrepreneurial opportunities compared to their higher-tax counterparts. Business owners and investors can benefit from a more dynamic economic climate, creating additional avenues for growth and success.

Ideal Conditions for Retirement
Retirement income typically relies heavily on passive investment returns and savings. States with no income tax help preserve more of this income, preventing retirees from facing significant tax erosion during a period when protecting cash flow is critical. Many wealth advisors recommend considering a relocation to a low- or no-income-tax state as part of comprehensive retirement planning.

Impact of Capped Tax Deductions
No income tax states maintain a capped deduction of $10,000 on state and local taxes (SALT) from federal tax returns. In practical terms, this allows individuals to receive state-level income without facing significant limitations on federal deductions. In contrast, high-tax states often leave wealthy individuals with minimal opportunity to shield income through federal tax strategies.

The Disadvantages of Having Residency in States with No Income Tax

Despite the numerous advantages, relocating to a no-income-tax state is not always a simple decision. The process can be lengthy and complex, often requiring significant lifestyle changes and professional planning.

Personal Preferences and Lifestyle Considerations
For many, factors such as climate, community, and proximity to family influence relocation decisions as much as financial considerations. Whether it’s the cold of Alaska or the humidity of Florida, personal comfort plays a critical role in long-term satisfaction.

The Complexity of the Process
Transitioning to a no-income-tax state requires careful documentation and adherence to residency rules. Wealthy individuals, especially those with business ties in high-tax states, may encounter legal hurdles and extended timelines when establishing residency.

Other Forms of Taxation
Even states without income taxes generate revenue through higher property taxes, sales taxes, and fees. Understanding the full financial impact of relocation requires a comprehensive tax strategy.

Why Professional Guidance Matters
Given the high stakes, navigating dual residency and optimizing your financial plan is best approached with expert research and careful planning. PillarWM Finder provides a curated, research-based directory to help high-net-worth individuals connect with independent investment firms, private investment management services, and fee-based advisors that meet their needs.

To start exploring the best opportunities available for your wealth and future:

Discover how the right independent investment firm can help you protect your assets, optimize your portfolio, and align your financial future with your personal goals.