[2 minute read] Considering changing state residency for tax purposes can be a strategic decision for many individuals looking to optimize their financial situation.
Are you thinking about changing your state residency to save on state income taxes? Or maybe you are moving and want to make sure all your paperwork is filed correctly?
It’s important that you complete the process of establishing residency in a new state and terminating your residency in the former state, otherwise you might be liable to pay taxes in both states.
This article will walk you through changing your state residency.
What Does ‘Domicile’ Mean?
Although the exact definition varies from state to state, generally speaking, your domicile is the state that you treat as a permanent home.
So, even if you’re a digital nomad and spend a lot of time travelling, you always come back to that state. It’s your ‘base.’
You can only have a domicile in one state at a time. However, there are circumstances under which you might be seen as domiciling in one state and a statutory resident in another state. In this scenario, you could be due to pay tax in both states.
What Makes a Statutory Resident?
You will be considered a statutory resident if you spend more than half of the year in a specific state.
So, if the state proves that you spent over 183 days within it, you will be rendered as a statutory resident.
How to Establish Domicile in a New State?
Sometimes states carry out residency audits that aim to check that residents are not lying about their domicile to avoid taxes. This is common in states with high state income tax like New York or California.
That’s why it’s important to do all the paperwork right and avoid a surprise double tax bill or a lengthy legal process.
The best way to change your residency safely is by keeping a paper trail of your move.
Change of Address
The most obvious step is changing your mailing address. Nothing says ‘I live here’ like a congruent mailing address.
People tend to skip or forget this step, especially as electronic communication is the norm and no one sends letters anymore. However, setting up a mail forwarding service and changing your address with banks, on contracts, etc. will work in your favor.
If you have a registered business, you can use a virtual mailbox service to set up a mailing address for your business in the new state.
Driver’s License
Your driver’s license should be registered in your new state. The process is usually straightforward in most states and doesn’t take much time.
Don’t forget to also register your car in the new state.
Voter Registration
Another easy step is registering for voting in your new state. You might be able to do that at the same time as changing your driver’s license.
Banking
If you can, close your bank accounts in your former state and open new ones in your new state.
This should be an easy process and can be done in a day.
If you’re not in the U.S. you can open an online bank account with Wise, and close your old account.
Register a Business
If you’re a digital nomad or a digital entrepreneur, and your business doesn’t have nexus in any state, then you can register an LLC in your chosen state to support your paper trail.
Nexus means a physical connection between your business and a specific state, this could be a warehouse, an office, or employees.
You can register your business in any state online. The process is fast, easy, and affordable.
Choosing your state: If you haven’t chosen a state to register your business in you can find out which states offer the most benefits here.
Tax Filing
You can file a resident income tax return in your new state and a nonresident return or no return in your former state. First, check with your state to see what’s required.
Property
If you own a property in your old state you might want to sell it or rent it out to show that you no longer live there. If you’re renting your property out, make sure to rent it at a normal market value and avoid renting it to family or friends.
Renting or buying a home in your new state will show that it’s your new home state and you’re settling in.
Renting or selling your home often means you have to use the services of a notary. If you want a more flexible option that allows you to notarize documents from anywhere in the world, opt in for an online notary.
Summary
To avoid double state income tax you have to set up your residency in the new state correctly. Some states carry out residency audits, so it’s good to have a paper trail.
Changing your mailing address, renting or selling your home, registering your business in the new state—these are some of the things you might want to consider.
If you’re looking for an easy and fast way to register your business in any U.S. state click here.
