Are you considering changing your residency from Massachusetts to another state? You are not alone. It is common for High Net Worth (HNW) individuals to change their home state, oftentimes motivated in part by tax reasons (i.e., moving to a state with lower or no income tax, such as Florida or New Hampshire). With the possibility that Massachusetts voters may approve a Constitutional Amendment this November which would impose an additional 4% tax on taxable income over $1 million beginning in 2023, a change of residency may be uppermost in some Massachusetts residents’ minds this year.
Undergoing a residency change is not a simple task. There are many planning considerations to keep in mind and steps you should take when going through this process. It’s important to be aware that the rules vary from state to state. This blog post focuses on Massachusetts, but the process may be different if you are considering leaving another state. It’s also important to know and follow the rules (if any) of the state (and the town or city therein) where you wish to claim residency.
In this blog post we provide some insight on this topic and outline the following:
- Massachusetts residency laws and guidelines
- Best practices and a checklist for domicile planning
- Guidance for handling residency audits
There are two “tests” used to define a Massachusetts resident:
- Domicile Test:
- Any person domiciled in Massachusetts (per definition of “domicile” below)
- Physical Presence Test:
- Not domiciled in Massachusetts, but (1) spends more than 183 days (including partial days) of the year in the state and (2) maintains a permanent home in Massachusetts.
Your domicile is defined as follows:
- Where you reside, with the intention to stay permanently and not return to your former home.
- The dwelling which is considered the “center of your life” (e.g., family, social, economic, and religious life) or where your “heart” is.
Domicile can be subjective and a judgement call. In a residency audit, the burden of proof is on you to establish that your domicile changed from Massachusetts to a new state. It’s important to note that your domicile is not necessarily your place of residence. You might have multiple residences, but you can only have one domicile.
Below is a sampling of domicile factors considered by the Massachusetts Department of Revenue (DOR) when examining a person’s ties to Massachusetts compared with their ties in the new state of domicile:
- Physical presence (i.e., the number of days spent in each location)
- A residence’s value, size, and amenities (often will be greater for your primary residence/domicile)
- Where family and religious events are celebrated (i.e., “where your heart is”)
- Family, social and business activities, and connections
- A person’s story (i.e., what life changing event led to the domicile change?)
- Examples include marriage, divorce, illness, or retirement
As noted earlier, each state has its own set of rules and guidelines. For example, New York is more lenient than Massachusetts about the physical presence test. New York does not count days where you are just “passing through” (i.e., boarding a plane or other vehicle for out-of-state travel), and in some cases might not count hospital stays, whereas Massachusetts does count these days.
A domicile change motivated by tax reasons is allowed but will be closely monitored. It is strongly recommended to move well in advance of a significant tax event (i.e., a major sale/gain recognition or other liquidity event). You should also have non-tax reasons that factor into your decision to move, and which are well-documented.
The following are some best practices for domicile planning if you are considering a move out of Massachusetts:
- Divest of all Massachusetts residences. Document the move by using a professional moving company with invoices that clearly state dates and household items (e.g., furniture) moved.
- Spend fewer than 50 days in Massachusetts and more than half the days of the year in your new state of domicile.
- Assume you will be audited. Seek tax and/or legal professionals ahead of time for assistance with understanding domicile law, audit planning, and evaluation of Massachusetts-sourced income as a non-resident.
- Be mindful of items that track location such as EZ-Pass and credit cards.
- Spend holidays and other family gatherings and major events in your new home state (i.e., where you want to claim domicile).
- Transition professional services to your new state of domicile (e.g., banking, medical, and dental providers).
- Clubs, memberships (e.g., GHIN membership if you are a golfer) and ties to other organizations (e.g., season tickets for local sports teams) should be strongest in your home state.
- When making charitable donations, these should be primarily to organizations in your new state of domicile.
- Update estate planning documents such as wills and trusts to reflect your home state.
There are other estate tax implications to consider that will be scrutinized by the DOR. For example, if a person moves shortly before death, the obituary should reflect the new state of domicile; otherwise, estate tax could be assessed in the prior home state.
The following items should be updated to evidence your domicile change:
- Federal tax returns
- Local property tax exemptions
- Driver’s license
- Voting registration
- Mailing addresses (e.g., on credit cards, mailings, subscriptions, bills, etc.)
- Auto/boat registrations
- Insurance policies
As mentioned above, when undergoing a domicile change you should prepare to be audited. The best way to plan for an audit is to follow the best practices above, particularly hiring tax and/or legal professionals and carefully documenting your whereabouts. The DOR will likely question the domicile change if you continue to maintain a home in Massachusetts and are present in Massachusetts for more than 100 days during the year. They will also look closely at whether the domicile change appears to be tax-motivated (i.e., before a major tax event). One way to limit this questioning is to prepare a detailed and personal narrative for the auditor explaining the intent/event surrounding the domicile change. It is likely you will need to defend the audit via an appeal and/or litigation process.
In conclusion, if you are seeking another state of domicile, you should demonstrate strong ties to the new state while also monitoring where your time is spent to avoid statutory residency in Massachusetts. Strong recordkeeping strategies and procedures, along with establishing permanent connections to your new state are critical in navigating these complex residency requirements. No single act is sufficient to establish a change in domicile. Rather, a combination of multiple factors and detailed documentation will ultimately serve as evidence of your new home.
As mentioned above, it is imperative to enlist experienced tax and legal professionals for guidance on this matter, as JDJ does not offer tax or legal advice. However, we can assist with planning, coordinating, and executing a residency change. Please contact a member of your JDJ team if you would like assistance.