Federal tax changes make the Sunshine State even sunnier

The Sunshine State is looking sunnier every day, thanks to changes in the federal tax code. A newly enacted limitation on the deductibility of state and local taxes (SALT) is prompting residents from high-tax states such as New York, Connecticut and California to explore new ways for reducing their tax exposure – and that’s leading them to relocate to Florida. The change in the federal tax code combined with Florida having no personal state income tax has become a key driver in the relocation of many to the Sunshine State.

Since the new tax law went into effect last year, our firm has received a substantial number of inquiries about the requirements for establishing tax residency in Florida and have assisted many of these clients in relocating to Florida. All of this is for good reason. Under the new rules, taxpayers, generally, can only deduct up to $10,000 of SALT as itemized deduction, which is just a fraction of what is typically paid in these states.

For example, under prior law, if a New York resident paid $35,000 in New York State income taxes and $25,000 in real estate taxes in a given year, they would have been able to deduct a combined amount of $60,000. However, under the new law, the total deduction is limited to merely $10,000. At a tax rate of 37 percent, this would increase an individual’s federal tax liability by at least $15,000 each year, should one continue to live in New York. As an individual’s associated taxable income increases, this additional tax liability can easily grow rapidly and reach over six figures.

Given numbers like these, it’s no wonder why an exodus to Florida is underway.

However, establishing Florida as one’s domicile isn’t as easy as changing a primary address on paper. While spending 183 days in Florida will help you become a resident, establishing domicile in a new state requires checking many more boxes. Developing a plan of action is critical to ensuring a seamless process and avoiding penalty-invoking missteps along the way.

This is all about truly moving your domicile to Florida; a legal term for where you call home, as evidenced by your intent, facts, and circumstances. However, this doesn’t mean you must cut ties with your former home state. Maintaining secondary residence, spending time with family, and other activities can all continue, but must be weighed against the abundance of evidence described below.

▪ Maintain meticulous records, such as diaries, monthly shopping, and flight records to substantiate that you have spent a minimum of 183 days in your new home state.

▪ File a Florida Declaration of Domicile.

▪ Purchase a residence, file for homestead and relinquish it in your previous home state.

▪ Register to vote, obtain a Florida driver license, transfer automobile registration, and relinquish these rights in your previous home state.

▪ File all federal income tax returns and any other state and governmental items with a primary Florida address.

▪ Relocate your primary business activities to Florida, if applicable. Open Florida-based bank accounts, move any safe deposit boxes, and conduct the majority of your spending activities here, such as shopping and philanthropy. Become involved with religious and civic organizations in your new hometown.

▪ Update estate planning documents like your will, healthcare directives, and power of attorney.

Another major consideration when planning a relocation is the lack of tax on transfers of wealth upon death, like an inheritance, or during life, such as a gift. Many states that impose significant income taxes also impose inheritance and gift taxes that can tax up to 20 percent with lower exemption levels than at the federal level. While inheritance and gift taxes at the state level can be imposed on estate and gifts as low as $1,000,000, cumulatively, Florida imposes no such taxes. This means that in high-tax states, estate and gift taxes could be imposed if there is no federal estate tax imposed.

Florida’s economic growth over the past two decades has created numerous inherently desirable locations within the state for business leaders and executives looking to relocate. Florida is becoming a particularly attractive region for the financial, hedge fund, private equity, professional service and technology sectors where a high caliber labor force is required, and cost savings are essential.

Losing residents to low-tax states like Florida means a loss in revenue for places like New York, Connecticut and California, so those state governments are not going to let go so easily. These states will be extra vigilant about making sure these taxpayers are honestly and legitimately claiming a change in residency, as well as taking actions in support of such a change. It is imperative to follow the requirements above, otherwise they will continue to tax someone as though they are a resident of one of these states.