Dual State Residency for High Net Worth Investors
State income taxes and other taxes are becoming increasingly onerous and lopsided, particular in certain high-tax states like California and New York.
Combined with increasing federal taxes, inflation, and economic uncertainty, many investors with high net worth are looking to establish dual state residency, often in one of the seven states that doesn’t charge income tax.
But is this a smart move?
What are the risks? How does dual residency work? Will you be taxed in both states? What do you stand to gain by changing or altering your tax residency? Is it worth the trouble?
No one wants to pay more taxes than they need to, and that’s why we wrote this article – to help you be informed about setting up dual state residency as a way to reduce your tax burden.
By the end, you will understand dual state residency requirements and know how to establish dual state residency as a high net worth or ultra high net worth resident.
Also, for specialized help in growing and protecting your wealth as a high net worth investor, request a free copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning.
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Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
If you have between $5 million and $500 million dollars in liquid assets and want to talk to someone about managing and securing your wealth, consider working with a private wealth management firm for your financial management.
Pillar Wealth Management has helped high net worth and ultra high net worth clients with their wealth management for decades. Our wealth managers are dedicated to understanding and meeting your unique requirements and creating a customized plan that helps you achieve your financial objectives. If you would like to consult with one of our experts, you can schedule a meeting.
Table of Contents
What is Meant by Dual State Residency?
How can you have dual state residency?
Quite simply, you can have dual state residency when you have residency in two states at the same time.
Here are the details:
Your permanent home, as known as your domicile, is your place of legal residency. An individual can only have one domicile at a time. While each state can have its own criteria for defining who a resident is, typically, a resident is someone who is in that particular state for purposes that are not temporary.
This is where it gets complicated:
Renouncing your residency in a high-tax state with the aim to avoid taxes is not as simple as it sounds. Depending on state tax laws, you could be charged with dual taxation if you’re a resident in both states.
The definition of ‘domicile’ can become quite tedious, even specifying the number of days you are present in a state, in some cases. This is one way residency requirements vary by state.
It gets worse:
Some states can tax you on your entire income, regardless of where or how you earned it. This can even include the profits you make through investments.
Hence, you should take precautions when it comes to your tax planning when considering dual residency. Our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning reveals strategies used by wealth managers to minimize the taxes of high earners with millions of dollars in net worth.
How State Taxes Apply to High-Earners
Although there are benefits to being a high-earning individual in this country, a high-net-worth financial status can incur some tax implications as well.
The most well-known of these is the alternative minimum tax (AMT), which is a flat rate applying to the adjusted sum of taxable income above a particular threshold.
But here’s the most important point:
State taxes usually affect investors with millions of dollars more than they affect the average taxpayer.
State income taxes are charged on any income you generate within a particular state. Generally, states charge taxes using a flat income tax or progressive tax rates.
Here’s the breakdown:
7 states charge no income tax. These states are Alaska, Nevada, Florida, South Dakota, Tennessee, Texas, Washington, and Wyoming.
North Carolina, Michigan, New Hampshire, Colorado, Kentucky, Illinois, and a few other states use a single flat tax rate for all profits.
Washington D.C. and a majority of the remaining states have progressive tax structures, which means that higher incomes are liable to higher tax rates.
States that put high-earners in high tax brackets can have tax rates up to 14%, excluding the taxes you’ll have to pay on property, utilities, fuel, and other facilities.
If you live in a state like that, and your net worth is rising into the seven or eight-figure range, relocating to a state with no income tax might seem like a good prospect. Just don’t forget that every state has to generate tax revenue, and states with no income taxes usually have higher property taxes, sales taxes, and perhaps business taxes.
Rigorous tax planning throughout the year can help you overcome the hurdles associated with taxes. If you want to invest more than 5 million dollars while keeping an eye on your taxes, you can request a copy of our book, 7 Secrets to High Net Worth Investment Management, Estate, Tax, and Financial Planning – For Families With Liquid Investable Portfolios Between $5 Million and $500 Million, for insights on tax planning.
How To Establish Dual State Residency
Let’s talk domiciles:
According to the 183-day rule for state residency, a person is considered a resident of a state if they spend more than 183 days per year in that particular state. This includes living in one state but working in another. If you have not been to your domicile state for 183 days, you can be considered a dual resident. Hence, you can be taxed in both states.
To avoid dual taxation, it is important to establish residency in your new, lower tax state. To establish a domicile in another state, you can take steps such as:
- Sell your house, list it for sale, or rent it out for an extended time to third parties.
- Move your personal belongings from your former residence to your new one.
- Try to avoid going back to the previous state for as long as possible. If a state contests your claim that you moved, they could subpoena your mobile phone records to prove your whereabouts.
- Purchase a new home in the state you’re trying to establish residency in and move into that home.
- Register to vote in your new state – this is a big one. You vote where you live.
- Get a driver’s license in your new state.
- Register your vehicles in the state you want to be established as your domicile.
- Be employed in your new state.
- Get memberships in local clubs or foundations.
Changing and establishing residency in a new state is a proactive process that requires proper preparation and documentation. You should speak with a legal expert if you want to learn more about dual state residency requirements or the requirements for obtaining citizenship in another state.
Our wealth managers can assist you with your tax management and wealth management throughout this process. If you would like to find out more about our services, you can call us up to book a meeting. We can help you with a variety of wealth management services, such as investment management, estate planning, and wealth enhancement. If you want to learn more about our strategies to improve portfolio performance, you can read our Performance Guide.
Statutory Residency and Presumption of Residency
As a high-earner, you should be aware of the risks that come with a high net worth.
Dual state residency can be established if you are a statutory resident of another state. In this case, you’re considered a statutory resident if you maintain a permanent place of residence in that state or spend more than 183 days in that state. Of course, these rules differ with each state and how they establish residency.
In New York, residency rules can be bothersome for non-residents who have a home there, even a vacation home. They can be considered statutory residents, but that will not exempt them from the taxes in their domicile state. There is the option to obtain relief via tax credit for some of the double-taxed income, but the entire tax burden cannot be eliminated. In California, you are considered a resident if you spend more than nine months in that state.
And it’s not just income taxes you have to worry about.
Changing your residency can also incur estate taxes or inheritance taxes, depending on the state.
For example, Illinois and New York both impose the highest estate taxes, but Florida has no state estate tax obligations. These are applicable to the in-state properties. Tangible properties or real estate located in a taxpayer’s domicile is subject to estate taxes by the state in which they are located.
Valid, contrary evidence can be used to resolve residency presumptions.
But let’s get real:
The last thing you want is to have to go to court to prove your residence against a tax-hungry state government.
Hence, you should consider working with a financial professional to help you navigate through this process. Our wealth managers are trained in handling the complex financial situations of high-earners. If you would prefer to get in touch with our team for assistance in your wealth management, you can schedule a consultation with us.
Points to Take Home
With dual state residency, there is no assurance that you’ll be taxed as a resident of your choice of stead. Changes in residency are assessed on specific facts and your individual circumstances. Moreover, many states are proactive in resisting changes in residency to prevent losing tax revenue.
In other words, yes, they really are out to get you.
Especially the high tax states.
With all the variables to consider, changing your residency status can be a complicated procedure. Relocating may not be the best choice for you, depending on your financial situation and priorities.
Because you also have to consider the practical realities of where you want to live. Sure, Wyoming is a no-income tax state. But do you want to live there?
A financial advisor can provide you with the best advice on this subject while also educating you about essential details such as which states do not levy a state tax, how to establish dual state residency, and dual state residency requirements.
Wealth managers are well-versed in numerous financial matters concerning high-earners, including dual state residency and how it affects your tax bill.
At Pillar Wealth Management, our team of wealth managers offers an array of wealth management services, from tax management to risk management. We can help you enhance your wealth while keeping an eye on any potential risks or liabilities.
If you are interested in investing between $5 million and $500 million dollars, we can help you with your investment management by creating a personalized financial plan. If you are interested in availing of one of our services, feel free to contact our team for a free initial consultation.
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