Florida means sunshine, sandy beaches, and year-round recreation. but it also means lower taxes for individuals who do not pay state income tax and for businesses that benefit from one of the lowest overall tax burdens in the country, according to the Tax Foundation. The combination of great weather and tax climates, plus the 2017 tax law’s limitation on state and local tax deductions has caused record numbers of “refugees” from high tax states, including New York, Connecticut and California to name a few, to flee to low or no tax states like Florida. This exodus has only been exacerbated by health concerns about COVID-19’s grip on highly populated, dense cities.
Residents considering such a move to Florida would be wise to discuss what is required in order to establish residency in Florida with a tax professional who specializes in state and local tax law and who has experience working with state auditors in this new era. Together, you can determine realistic time horizons, set goals, and plan your Florida residence strategy. Ideally, planning occurs over a twelve to eighteen-month period; during this time, you can be actively building your residency case in Florida using our Residency Checklist excerpted below which guides taxpayers on relocation strategies related to your tax position.
Why is this important? Does it really take that long to establish residency?
Residency Audits
Well before COVID-19 ravaged state budgets, residency audits were serious investigations with serious consequences. Today, the impact of the pandemic has depleted state revenues dependent on sales and income and spiked health care and other expenses beyond states’ rainy-day fund projections.
States concerned about deepening budget crises have ramped up their audit resources to investigate high net worth individuals, who may owe taxes as well as interest and penalties to their previously domiciled state. According to CNBC, New York Governor Andrew Cuomo blamed “wealth flight” for his state’s $2.3 billion revenue shortfall in 2019. Governor Cuomo is now projecting $13.3 billion revenue shortfall (compared to 2020 projections) due to COVID.
Auditors from New York and other high tax states are scouring real estate purchases and other public records to uncover potentially damning evidence. They have also become quite clever in their investigations; there are well-publicized cases of auditors from California, Connecticut and New Jersey using taxpayers’ gym memberships, dry cleaning expenses and dates of veterinary bills to prove taxpayers’ lack of intent to sever ties in their resident state.
Florida’s Homestead Law
One of Florida’s most well-known tax breaks is its homestead exemption on a primary residence. Property owners who can prove residency benefit from an exemption of up to $50,000. This point of pride for Floridians (along with no state income tax) is written into the state’s constitution. While the Homestead law is both a magnet for new Florida residents seeking property tax savings, it is also a treasure trove for auditors investigating taxpayers’ residency. It is also considered one of the country’s most complicated tax policies.
For example:
- You must live in your Florida residence for one full year before claiming homestead protection, claims cannot be prorated;
- You cannot rent your primary residence for more than 30 days in two consecutive years unless you have a military exemption;
- Ownership must be by a person or a trust not a corporation.
Florida tax officials diligently track primary residence claims with a special focus on rentals such as Airbnb and VRBO, which could put the coveted homestead exemption’s financial incentive at risk for homeowners. Loss of the exemption may also negatively impact homeowners insurance, creditor protection on the home and even a personal income tax audit. New Florida residents, whether full or part time, should explore the detailed requirements for homestead exemption with their state and local tax advisor.
Establishing Florida Residency
Filing for a Florida Homestead Exemption is an excellent way to begin establishing your Florida domicile. Residency auditors consider the objective statutory requirement to spend at least 183 days outside of your former residential state and use subjective intent to determine your domicile.
Our team of State & Local Tax experts routinely counsels taxpayers on transition strategies when considering a residency change. We have created a Florida Residency Checklist providing practical suggestions to help you prove intent.
Checklist examples:
- Maintain documents supporting a change in residency such as moving and storage receipts, plane tickets, termination notifications for telephone and utilities, details on purchases for new home;
- Register to vote;
- Relocate your artworks;
- Change your estate planning documents;
- Join social, athletic and religious organizations;
- Retain Florida based professional services such as doctors, dentists, and accountants.
These recommendations are important first steps towards organizing your case to demonstrate intent in your new home. There are other ways to protect yourself and to mitigate penalties if accused of willful intent to evade state taxes. In the end, changing state of domicile is more than meeting the arbitrary but statutory time-test but rather proving your intent to live in the new state.
Now is a good time to speak with our financial professionals who dedicate their practice exclusively to state and local tax issues. They have the knowledge to help you establish residency and the experience of working with auditors from various states to mitigate and resolve residency disputes.
