Home is Where the Heart is…Especially in Taxes (17:59)
When it comes to filing your taxes, the rate at which your income is taxed can vary based on the state in which you live, or where your domicile is. In this episode, we invite Adam Kotz of Mariner Wealth Advisors to discuss how the IRS determines your domicile and things to keep in mind when you move to a different state. Additionally, we dive into what this means for individuals who own homes in multiple states.
Brian Leitner: Hello and thank you for downloading another episode of Your Life, Simplified. My name is Brian Leitner, and I’ll be your host of this episode. So for those of you have been listening to the show for some time, you know that we ask our audience for topics, questions, suggestions; anything that they may have on their mind. One of our listeners emailed us a question regarding how you change your domicile and why you would want to change your domicile. We’re going to answer exactly what a domicile is. Today I’m joined by Adam Kotz, a senior wealth advisor at Mariner wealth advisors, to help us answer some of these questions. Adam, thanks for joining us on the show today.
Adam Kotz: Thanks for having me, Brian, glad to be here.
Brian Leitner: Adam, in way of background, can you talk a little bit about your background and what you do?
Adam Kotz: I’ve been working for around 20 years. I’m a CPA. I’ve been focused on tax, mainly in the individual space. I’ve been with Mariner for the last six years. I’m currently a director in the New York city office, and I work with clients, helping them with their investments and with taxes.
Brian Leitner: That’s great. Again, thanks for coming on the show. So, we get questions from clients on a regular basis. Obviously, as I said, one of the listeners emailed us a few questions. So their question’s regarding their domicile versus maybe where they live. Can you give an explanation on what is the definition of a domicile?
Adam Kotz: Domicile is really where your heart is. It’s where you want to be. And that’s what most states consider where your tax home is. So you might have multiple homes, but really where your heart is and where you tend to be with your family, holidays, doctors, that’s where your tax domicile is at.
Brian Leitner: So, as it relates to domicile, what are some of the major impacts of being domiciled in one state versus another?
Adam Kotz: Where you’re domiciled is going to be dictate where your income taxes are paid and also possibly where your state taxes are paid when you pass away.
Brian Leitner: So that’s important. And there are a lot of people who decide to retire somewhere else, right? They’re working maybe in New York or maybe in Kansas City or any state, and they want to retire to a different state because of the weather or because of the better tax rate or those sorts of things. So, taxes on your pre-retirement income as well as your post retirement income, as you think about taking distributions from your retirement accounts and Social Security and those sorts of things?
Adam Kotz: That’s correct. And a lot of our clients, you’ll see, have multiple homes. You might have a home in New York and a home in Florida or home in Kansas and a home in Arizona. And I think a lot of things to think about is when you have two homes, it’s not what you consider your tax home, it’s what the states consider. And that’s really where you intend to be. And spending 190 days in Florida doesn’t make it your tax home if you really intend to be a New Yorker. And that’s really where you are, and all your stuff that we call near and dear.
Brian Leitner: In the email we received, there’s an individual approaching retirement and thinking about relocating to Florida, and wondering what are the different things to consider. When you talk about the fact that Florida’s got a better state income tax, terrific weather most of the time, it sounds like a home run. What are the things that people should be considering if they are thinking about changing their domicile?
Adam Kotz: Mariner Wealth Advisors has a great checklist that we’re happy to forward along. One of the things I think you have to do is check all of the boxes for basic things. Change your address with the post office. Get a new driver’s license. Make sure your all your bank accounts are changed. Make sure on your investment accounts that the addresses are changed. One of the other things to think about is if you’re going to keep your current home and also have a home in another state is the stuff that we call near and dear to you. Pictures of the grandkids, pictures of your kids, the important artwork, your important jewelry. The state those items are in, the IRS will look to see where do you have those important things and that is really where your home is located.
If you’re going to go to Florida from New York, and more than the main reasons is to save on income tax and you want to still keep both homes, I think it’s important to move a lot of those important items if you intend to keep both houses. One of the things that we’ve used to help win audits is take pictures of these important things that are shipping and packing to move down: the baby pictures, artwork, jewelry, anything like that. Take pictures and document that you’re either shipping it down, putting into your car or even putting it into a moving truck.
Brian Leitner: And I know in the past I’ve heard you in conversations and onstage talking about the fact that, if you have a doctor, your primary doctor, that person should probably be in Florida, in this example, right? The place you’re really looking to domicile and those sorts of things. I mean everything that you could possibly think of to make sure that you’re on the right side of the IRS, if you will. And truly this isn’t a short-term decision, this is a long-term decision. I plan on spending my time, the majority of my time at least, in this area. Is there a rule in terms of how many days, or what this looks like in addition to some things that you talked about?
Adam Kotz: Yeah, so domicile is where your heart is. There’s also something called statutory residence and that is where you physically live. And that is a pure days count. And most states have the rule that if you’re there more than 183 days a year, and you have what’s called a permanent place of abode, which is a home, or access to a home, whether you rent or you own, that is your statutory residence. So, if you happen to be retiring from a high tax state to another state that is a low tax state, you could be domiciled in one state and be a statutory resident in another.
Brian Leitner: So, when it comes down to that, say you went through this process. Number one, is there someone you consult as it relates to this process? What does that look like? Is it something you do on your own? What do you suggest?
Adam Kotz: My recommendation is that you consult with your tax advisor and really have this documented before you make the move so that you know exactly what has to be done. When you want to move December 1, you know that as of that date, you are physically out of that state. You don’t want to find out three months later that you really didn’t move until February of the following year even though you thought you had done everything properly.
Brian Leitner: In the event of proving all this, this would be then based upon, you’re getting your card pulled for an audit if you will. Correct?
Adam Kotz: Correct.
Brian Leitner: So, ultimately it’s on the individual taxpayer to make sure that they’re documenting this accordingly. Because at the end of the day it’s going to be up to that individual to prove whether he or she truly changed the domicile or not. Accurate?
Adam Kotz: That is 100% accurate. The burden of proof is on the taxpayer, and when you get audited, most of the states will send a questionnaire out asking you when did you move, why did you move? And then you have to start providing documents. Some of the key things they look for, they’ll pull easy pass, they pull cell phone records, and if you don’t provide it, because you know it might not help you, they will subpoena the phone company and pull your phone records. And also cell phone towers can be key. Along with that, they’ll look at your credit card statements. So, they will get every month of credit card statements and bank statements, and they’ll start looking to see transactions. When you say you’re in one state, but they see transactions in another state.
Brian Leitner: And for the purposes of this podcast, these are generally the things to think about but ultimately each state’s a little bit different in terms of how they do this and how they decide you changed domicile and so forth. Is that right?
Adam Kotz: That’s 100% correct. There’s a general theme with most states on how they look at it and how they audit in terms of record keeping. But again, some can be stricter or some can be more lenient on some of the underlying personal fact patterns that aren’t either on paper or in days that are more specific to you.
Brian Leitner: So, that’s really helpful. So, we talked a little bit about the income tax side. Let’s move to more of the estate tax side. So, estate tax based upon where we are now in 2019 with the changes to the tax law last year, fewer and fewer people are subject to state taxes at the federal level. But there are states that are out there that follow the federal guidelines and, and others do not. What should people be thinking about as it relates to the estate tax and maybe even the probate process if they are going to relocate to another state.
Adam Kotz: My recommendation there is, once you’ve kind of settled in, it’s not an urgent matter, is to reach out to your accountant and make a decision. Should you be meeting with your estate planning attorney to go through your documents? Are the documents you have okay under the new state law or do they need to be redone? In some cases if you move from New York and New Jersey to Florida, you don’t have to redo it. And then there’s other times where you need to because of probate, or the trust that you were having created might not make sense under the new state tax law.
Brian Leitner: And just to back up for just a second, so everyone understands, probate is truly the process of proving the will. And so, for assets that go through the probate process, and not all assets do, there are assets that pass by contract of law, or depending upon how that asset is titled or even how it’s held. But generally speaking, every state has a different probate process, so if you’re going to a new state, you just need to be aware of what that looks like. So again, just something else to be thinking about as it relates to changing your domicile, right?
Adam Kotz: Yes, that’s correct.
Brian Leitner: So in addition to the estate state taxes, and the probate process, what might the financial savings look like by changing your domicile to a state that may be more tax friendly?
Adam Kotz: That’s easy from an income tax standpoint—every accountant can run the numbers and show you what it is—do the taxes under a new state jurisdiction. A couple of other things I recommend my clients to think about, it might not be deal breakers, but the real estate taxes. Just because a state has lower income tax doesn’t necessarily mean the real estate taxes will be cheaper. Also, sales tax can be higher. Some of the states that don’t have income tax, that’s how they make up their state tax revenue. They’re also going to want to look at the cost of living and where does that fall? And those are the kind of the main things outside of the income taxes that I look at.
Brian Leitner: Sure. So Adam right before the show, you started telling me about a case that you were familiar with that resulted in, somebody not wanting to pay taxes to New York. Can you walk us through that in a little bit more detail?
Adam Kotz: Yeah. So obviously New York is a very high tax state, and people want to try and avoid it. Things that we’ve been seeing lately are people working from home. As times change, you don’t necessarily have to be in the office to work. So, there is a New York tax case out there where an individual decided to move to, I think it was North Carolina or South Carolina but still worked for his company out of New York. And because he was not living in New York, didn’t set foot in New York, he didn’t want to pay New York income taxes. New York state did challenge this and they won. So, a lot of the general rules out there for that is, if you’re working at home for your convenience, for your enjoyment, maybe because your family is there, that doesn’t necessarily stop me from paying income tax back to say New York in this case. If you’re working at home for what we call the convenience of your employer, then you do not have to pay tax, in this case back to New York. But if you’re working at home for your convenience, then you’re still working in New York. New York looks at this, even though you’re sitting at your home and I think it’s North Carolina or South Carolina, you’re still and working in New York every day because of your choice versus your employers’.
Brian Leitner: Did the taxpayer continue to fight that?
Adam Kotz: No, this went to the Supreme court from New York, and he lost the case.
Brian Leitner: Okay. Well, that’s too bad for the taxpayer. So, with all the benefits of you changing your domicile to going to a state that has less income taxes, or these other benefits, what’s the downside? Are there any drawbacks to doing something like this?
Adam Kotz: The only downside for moving and changing all of this, is the potential of an audit. And I think that if you plan ahead accordingly and do the documentation that we mentioned today and make sure you’re set and prepared to handle this, then there’s really no downside. What most clients don’t realize is, if you move in early 2019, the audit might not happen for two or three years, and at that time some of the documentation or the facts that you had in your head are not as crystal clear. A lot of times when my clients move, I recommend they send me all the paperwork right now, and I will save it electronically. So, in three years from now, when you need it, I have it at my fingertips, versus you have it going into this shoe boxes or moving boxes that you moved and that are all packed away.
Brian Leitner: That’s great advice, and I’m sure that our listeners always want to be on the right side of the tax law. Having said that, is there a statute of limitations on changing your domicile and making sure that you have the right paperwork and all that good stuff? So, you mentioned maybe starting the clock, if you will. In that same vein, is there something that’s there that people can look to?
Adam Kotz: Most states typically have a three-year statute for when you file that gives the states the time to audit. That statute is usually intact, as long as you haven’t done anything fraudulent. So as long as you just moved, and everything was documented, typically three years. Some states do have different rules, California is four years, so I’ll say, look at what state you live in and make sure you checked out the statute.
Brian Leitner: And it’s another excellent point you made about just being meticulous on the paperwork itself and making sure that you have, whether it be receipts or other documentation, to help ensure that you have enough proof should you get that call.
Adam Kotz: That’s correct.
Brian Leitner: So, Adam, thanks for the technical expertise that you bring to the table as it relates to taxes and estate planning. You know, some other things that people want to think about is the psychological aspect of moving to a different place. And so, some folks may say that, I want to relocate or change my domicile to Arizona. I want to change my domicile to, say, Florida because they’d gone there three or four times in the past couple of years. And they love it. You know, things to think about maybe are, have you been in Florida? Have you spent a significant of time in Florida to really be there for say, 12 months to understand what the weather is truly like year-round?
Or to understand, if you’re closer to family now, and you want to be in the warmer weather, are you making that type of trade so you spend less time with your family, but you might get the better weather or even, just the way in which you might interact with folks down there. So, there are certain places I think that are maybe more accepting of people who are relocating there versus other people that are native to that area. So, different things to think about. Adam, I want to thank you again for being on the show. Before I let you go, I’m going to ask you the same question we ask all of our guests, and that is what is the worst financial mistake you’ve ever made?
Adam Kotz: So related to moving, not changing my tax domicile, but, as I started having a family, I went and bought one house thinking it was my house, you know, for the next 30 or 40 years to find out, probably two to three years later that my wife was not happy and it was time to move. And I had done a lot of renovations. So, I’ve learned that as you start to have kids and buy that house, that you want to raise your family and sometimes you need to think three or four years down the road, five years down the road. What might be perfect for you, for that newborn baby, might not be the answer come kindergarten time.
Brian Leitner: I’m sorry you had to learn the hard way. Hopefully it wasn’t too costly, but now being a planner yourself, I’m sure you’re not going to make that mistake again. Again, thanks for being on the show.
Adam Kotz: No problem. Thank you.
Brian Leitner: Everyone, thanks for listening to the show today. I also want to thank our special listener who sent in a that question. I hope this not only answers your question, but also promotes the idea that other listeners are out there. If you have questions, ideas, comments for the show, please go ahead and email them in [email protected].
Thanks again for listening.
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