There has been much debate recently about state income tax rates and/or states having no income tax at all. Recently on MSNBC’s Morning Joe, Joe Scarborough said he knows a lot of people who do what they can to avoid spending 180 plus days in his current state of Connecticut in order to avoid paying income tax there (Connecticut is currently considering hiking its state income tax rate). The reality is that while spending 183 days in a no income tax state like Florida can help establish residency there, meeting this threshold does not completely resolve the residency question or eliminate the legal requirement to file tax returns and/or pay income tax in other states. Indeed many states with income taxes are cracking down on “snowbirds” who attempt to claim residency in places like Florida and Nevada (no income tax states), but who also maintain homes in income tax states like Missouri, Ohio, and Michigan.

For example, let’s say you live in St. Louis and own a vacation home in Naples. You decide you’re sick of paying Missouri’s income tax and want to take up residency in Florida to avoid paying Missouri state income tax. In addition to exceeding the 183 day threshold requirement, establishing residency in a no income tax state like Florida involves several other steps, including buying/renting a home there, obtaining a driver’s license, registering your vehicles and registering to vote there, and changing your mailing address for all bills and financial statements to your new address. Yet, even if you do all these things in a no income tax state, the key question for state income tax purposes (and to survive scrutiny from your former state taxing authority) is where do you earn your income and/or where do you maintain your life? When scrutinized by state taxing authorities, courts look at the totality of circumstances and not just technical check the box type requirements for establishing residency for tax purposes. Are you still active in your church, synagogue or Rotary club back in Missouri? Where do you host family holiday gatherings? Where do you primarily conduct business (if you’re still actively working)? In short, the closer you walk to the minimum-day threshold and the more ties you keep with your former state, the more scrutiny you may face from your former state taxing authority. You must also recognize that even if you legitimately establish residency in a no income tax state like Florida, you still may be required to file a nonresident tax return and pay income tax to Missouri on income sourced there.

Folks considering establishing residency in a no income tax state should be mindful of the potential pitfalls and prepare for the scrutiny they may face from their former states of residency, particularly if they continue to maintain sources of income and property there. Establishing residency in a no income state is not a decision that should be entered into lightly or without counsel from an experienced tax professional.

For additional information, please contact Joe Orlet.