RMB Capital Management

Insights Library

A Snowbird’s-Eye View of State Income Tax Planning

« Go back to Library
By Terrence LaBant, JD, S.V.P., Director of Wealth Strategy
  • Jan 9, 2019

The past two federal tax acts have, arguably, made it more difficult than ever for taxpayers to produce federal tax savings. Since the American Taxpayer Relief Act of 2012, taxpayers have faced challenges when driving tax savings through itemized deductions, as the alternative minimum tax (AMT) has eroded the benefit of such deductions. Under the Tax Cuts and Jobs Acts of 2017, the AMT remains but affects fewer taxpayers because itemized deductions have been largely capped or eliminated altogether. In our article “A Review of State and Local Tax Deductions” from the Summer 2018 issue of INVESTED, we discussed how the new cap on state and local tax deductions further limits taxpayers’ ability to reduce their taxes.

Consequently, taxpayers (and their advisors) have shifted their focus toward state income tax planning to drive household tax savings. As illustrated in Exhibit 1, state income tax rates vary widely from one state to another. Some states—such as Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—have no state income tax. Two states, New Hampshire and Tennessee, tax investment income but not wage income. And others have rates that approach or exceed 10%. Taxpayers with the ability to change residency from a state with a high income tax rate to a state with little or no income tax can take advantage of powerful tax savings.

The typical advice on how to secure these state income tax savings when moving from one state to another seems fairly straightforward: Sell your current home and move away with no intent to return. Then buy a new home in another state with every intent to remain. But life is rarely this simple. Many taxpayers are “snowbirds” who prefer to reside in different states seasonally, balancing the desire to be close to family with the desire to avoid cold winters. In these cases, taking advantage of state income tax savings is more complicated.

From a tax perspective, there are challenges to changing residency. The state to which individuals move often welcomes them with open arms, whereas the prior home state often pursues them for ongoing tax revenue. To define residency, many states focus on the number of days someone lives in each state or the steps someone takes to demonstrate that their declared residence represents their “true” home. Generally, a snowbird should expect to spend more than six months in the new state of residence.

The rules for each state are different, so it’s important to investigate the applicable requirements for any states where you have already established residency or would like to.1 However, the following items provide a useful guide for snowbirds who are considering changing their state residency.

  • Maintain a log that details physical presence in different states, including travel and vacation dates. This log will help a snowbird who faces an audit from the former state of residence. Years ago, a snowbird could simply show an airplane ticket to mark seasonal travel and treat all days in between as qualifying days away from a former state of residence. Auditors now only count travel days when assessing residency and require snowbirds to demonstrate more proof of physical presence for the days, weeks, or months in between.
  • Be careful when placing utility services on hold by coordinating carefully with your daily residency log.
  • Expect to make major purchases, along with regular meals and entertainment, in the new home state. This helps demonstrate the proof of physical presence mentioned above. One former New Yorker purchased a coffee each morning with a debit card and took a picture next to the ocean with a daily newspaper to demonstrate his happy retirement as a Florida resident!
  • Plan to change voter registration, driver’s license, and vehicle registration to the new state of residence. If the state provides a means to declare residency through a court filing, take advantage of this opportunity as well.
  • Expect to join local clubs and organizations and also to purchase state residency licenses for recreational activities when appropriate. Keep in mind, purchasing these licenses will be less effective proof of official residency if you do the same in your former state of residence.
  • By the same token, take advantage of any new state homestead exemption tax breaks while discontinuing similar tax advantages in the former state. If you continue attempting to save money on property taxes based on resident discounts in your former state, it could keep you classified as a resident for income tax purposes as well, potentially undoing your planning and incurring all of the state income tax due.
  • Enjoy local conveniences for routine needs, such as banking and prescription refills, and form relationships with local healthcare providers and other professionals as appropriate.

Nuances like these can make state income tax planning challenging, but—in an environment of ever-decreasing tax-saving opportunities—the extra effort can be worthwhile. If you happen to enjoy the migratory patterns of the snowbird, speak with your RMB advisor to make sure your income tax savings opportunity doesn’t end up costing you instead.

An Audit Anecdote

In hopes of collecting ongoing tax revenue, former states of residence often audit snowbirds who move without selling their prior home. One client recalled this story of his audit: “The auditor asked me to name the most important things that I would carry out with me if my house was on fire. I named a few things, and then the auditor asked me where they were right now. Luckily, I had moved all those sentimental items, including my dog, to my new home and then traveled to my former state for the audit exam. Imagine if I had left them in my former home when I answered that question!”