If you claim to live somewhere else, be certain that you do.
Some states, like New York and California who have steep state income taxes, are experiencing an exodus of high-income and wealthy households. A significant number of those relocating are voting with their feet and moving to states with significantly lower rates.
For some, that winter condo is now their principal residence. As a result, projected revenue by these high-tax states is well below what they initially expected.
When it comes to state taxes, Michigan ranks near the middle relative to the other states. In other words, in this day and age of mobility you can do more than just protest or vote against high taxes.
You can actually change where you call home to reduce your tax burden. But you have to be careful! Numerous states are questioning whether you really did relocate, especially if you maintain a strong presence in your former state of residency.
A number of people believe that if they simply stay in a state for 183 days (the so-called physical presence test), that they will meet the residency requirement. But not every state agrees and some are aggressively challenging that common belief with residency audits.
Auditors are looking for what they consider to be fake moves, contrived simply in an attempt to recoup lost revenue.
Years ago, before the sophisticated technology we have today, one of my financial journals ran an article about a quarter car wash owner who claimed minimal income. The auditors proved otherwise by obtaining records of the amount of soap the car wash purchased.
Nowadays you need more than just a driver’s license and vehicle registration to prove state residence. Auditors are clever, and technology has enabled them to dig much deeper to make their case.
For example, they can look at social media and cell phone records to see if you were where you claimed to be. They can inquire about where you keep your safe deposit box with valuables and personal records. And that’s not all.
If your doctor, dentist and your pet’s veterinarian are all back in the state you allegedly left, you could have a major issue. Don’t leave your family heirlooms and photos in your former home either. You’d likely have a hard time convincing auditors that you no longer live there.
It appears that Michigan is not as aggressive as some states in challenging households that relocate to another state but continue to maintain a Michigan residence. But the auditors will investigate if there’s a serious concern.
And when it comes to audits, you just never know. That’s why you should avoid going down a foggy road. If you’re considering changing your residence while still maintaining a property in the state you’re leaving, it’s a good idea to speak with your tax advisor.
I want people considering a change to understand that the wind is shifting regarding the definition of state residency. Permanent residency is no longer magically defined by 183 days.
Many states are aggressively challenging that misconception and seeking back taxes. If you own more than one place, be absolutely certain you know which one is your legal residence.
Oh, and one more thing. Have I reminded you lately that my book “A Thought for Your Pennies,” will soon be available through Amazon and Barnes & Noble? Consider it done.
