No tax states
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By JEANNE SAHADI

You might think that moving to a state with no income tax would greatly simplify your tax life. Not so fast.

If you're not careful, it could greatly complicate things and cost you tons in back taxes and penalties. For example, if you are still planning to spend significant time in your former state, you better limit it to less than 183 days.

Why? Spending any more time there could mean you'll be treated as a resident of that state and therefore have to pay tax.

And it's not just days spent in-state that tax authorities may scrutinize. They will look at a host of factors to see if you legally owe them taxes despite setting up a new home elsewhere.

"States will often take the most minute shred of evidence to make an assumption of residence and follow that path in pursuit of collecting state taxes," said CPA Jon Blakesberg of Boca Raton, Fla.

This issue, of course, doesn't only apply to people who move to states without income tax. And it isn't exclusive to wealthy people, but they are more likely to be shuttling between properties in different states and end up in the cross hairs of the taxman.

New York and California are known as particularly aggressive in pursuit of former residents who've moved to places like Florida and Nevada. (Texas, South Dakota, Washington, Wyoming and Alaska also don't impose income taxes, while New Hampshire and Tennessee only tax interest and dividend income.)

But other states may get more aggressive in pursuing former residents, now that technology lets them analyze data better and faster from places like the IRS, said Cara Griffith, editor-in-chief of state tax publications for Tax Analysts.

To avoid suspicion and prove that you've established legal permanent residence in the new state, you'll have to jump through some hoops.

As soon as you move, you should change your driver's license, car registrations, voter registration and mailing address for all bills and financial statements. You may also need to file a non-resident return to your old state if you earned any income there.

Even a minor oversight could create a headache, Blakesberg noted. One client, for instance, moved from Massachusetts to Florida, but the custodian of his retirement plan kept withholding Massachusetts tax on his annual distribution. The client ended up having some back-and-forth with Massachusetts tax authorities to remedy the situation.

It's also important to keep proof of how many days you actually spend in your old state. Requirements vary, but typically you must spend less than 183 days in a state to be considered a non-resident.

"If you're straddling the line closely, be prepared for more scrutiny," said Kathleen Thies, senior state tax analyst at CCH.

That's why tax experts advise clients who've moved to keep a meticulous travel log, complete with gas, toll and airline receipts, credit card records and the like.

And be prepared for some weird scheduling problems.

Still sit on the board of a company or other organization in your former home state? Better hope the quarterly meeting won't push you over the 183-day mark.

Will your flight back to your former city get in at 11:55 pm? Those five minutes in-state may count as a day against your total.

Now, no one's saying you can't maintain ties to your former state -- whether by having a bank account there or owning a property, or coming back to visit friends and family.

But it's a matter of degree. Where is your most active checking account? Where's your main office? Where do you return to most frequently after a trip? If you go to church on Sundays, do you spend more Sundays at your old church or your new one? Same goes for country clubs and gym memberships.

"The courts will look at the entirety of the record. It mostly comes down to 'Where is your life?' " said Verenda Smith, deputy director of the Federation of Tax Administrators.

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145 Comments

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TWOLFRN

i moved to this god for saken state NY from my home state of ILLINOIS..back in 2008, Illinois was in good financial shape back then......now it looks like New York state....

June 24 2013 at 6:38 PM Report abuse +1 rate up rate down Reply
1 reply to TWOLFRN's comment
setanta54s_back

get out while you still have the energy and motivation.

June 27 2013 at 8:44 AM Report abuse rate up rate down Reply
uhlerrobertj

Stupid article. Assuming that residency is established, the SCOTUS has ruled that states can't pursue former residents for taxes once they have left. If you earned your pension/ 401K/ IRA in CA or NY and move to FL, WY, or wherever, the state you used to live in can't touch you. Spend a few bucks on an accountant.

June 24 2013 at 6:31 PM Report abuse +1 rate up rate down Reply
1 reply to uhlerrobertj's comment
RYCH

You are correct uhlerr....this is known as public law (PL - 104-95) and was passed by Congress on January 10, 1996 during the left-wing BJ klinton administration.

June 24 2013 at 7:54 PM Report abuse +1 rate up rate down Reply
wbearl

Several of retired friends have sold their homes in Minnesota, bought motor homes or large trailers, then registered the vehicles in South Dakota, making themselves South Dakota Residence. South Dakota has no income tax. There are business in South Dakota that rent mail boxes, accumulate your mail and then forward it to where ever you want. They live in Texas, New Mexico and Arizona all winter and come north in the summer.

June 24 2013 at 6:22 PM Report abuse rate up rate down Reply
rychdog

In what resident STATE would you have suggested that George H Bush pay state income taxes to?

June 24 2013 at 5:36 PM Report abuse -1 rate up rate down Reply
1 reply to rychdog's comment
phil

..and he hasn't been President for how long???? p.s. How's that "Hopey/Changey thang workin for you?

June 24 2013 at 6:47 PM Report abuse +1 rate up rate down Reply
1 reply to phil's comment
rychdog

Phil...the lack of intelligence of some of the American people is stunning....

June 24 2013 at 7:46 PM Report abuse rate up rate down
hb341

I will never forget when it was revealed that George H. Bush paid no State Income Tax because he sublet a $250 apartment while he lived in the White House for 12 years!

June 24 2013 at 5:29 PM Report abuse rate up rate down Reply
3 replies to hb341's comment
my110percent

Generally speaking, if you are blessed with the opportunity of relocating from a liberal, fiscally-irresponsible state (CA, NY, IL, etc., etc.) to a conservative, fiscally-responsible state, you need to move the day before yesterday.

June 24 2013 at 5:01 PM Report abuse -1 rate up rate down Reply
harryb2378

Sometimes the little guy wins big! Take a look at the Supreme Court and Nevada judgements for the "Gilbert Hyatt vs FTB" case. Hyatt won the case and California currently owes him ~ $500Million. Yes, that's $500 million.

June 24 2013 at 4:57 PM Report abuse +1 rate up rate down Reply
iamez2nv

Should be "Perils of trying to escape a high tax state"

June 24 2013 at 3:54 PM Report abuse +2 rate up rate down Reply
pwanless

My wife grew up in South Dakota, a no-tax state, and it's not really a place you would choose to live, unless you're a farmer who doesn't mind having nothing around you for miles. First, many places will charge a city tax in addition to sales tax. Corporate jobs are scarce, and if you do get one, you have to be prepared to stick with it for many years, as there are no similar opportunities in the state that give you leverage to quit if things get bad. Most towns except Sioux Falls are smaller areas with locals extremely set in their ways (so if your views are different, be prepared to be run out of town), and a single main source of employment with a few scattered side businesses. The state does have some nice areas and many lakes with cabins along the shore, so if you can afford it, it's a great place for a vacation home with cheaper property taxes.

June 24 2013 at 3:38 PM Report abuse -1 rate up rate down Reply
RMS

WILLS: agreed, you have to look at all the angles. Having lived in both Florida and New York, there are pros and cons to both, not just that NY has a state income tax and Florida doesn't. I noticed the lack of social services in Florida, as well as county and municipal budgets strained as many residents are on fixed incomes and do not want any sort of tax increase, especially for school spending. My car insurance is much cheaper in Florida, so are real estate taxes and the cost of real estate. But, water is much more expensive, and you are heavily dependent on electricity for heating and cooling and appliances as many areas do not have natural gas available. You need to run the AC most of the year due to humidity, and not just due to the heat. Homeowner insurance is very high in Florida as well. Car registration in Florida is about $75 a year, and there isn't any annual inspection/emissions test like there is in NY. However, Florida has a high percentage of uninsured drivers, and in general drivers in Florida are the worst. Florida can be a nice place to live if you don't have to work for a living. Good jobs are scarce, so if you have a pension, SS, or other source of income you are fine. So, again, many factors to consider.

June 24 2013 at 2:13 PM Report abuse rate up rate down Reply