30 Nov advice for anyone considering to move to the Sunshine State
MARK SCOTT, JD, LLM, is Principal at Kaufman Rossin and Secretary of The Miami Foundation’s Board of Trustees. He also serves as Adjunct Professor of Income Taxation of Trusts and Estates at the University of Miami School of Law’s Graduate Tax program.
STEVEN HADJILOGIOU is International Tax Partner at McDermott Will and Emery and Adjunct Professor of International Tax at the University of Miami Graduate Tax Program.
What is influencing individuals to consider moving to Florida, particularly now that working remotely is acceptable for many?
MARK: People considering a move to Florida are drawn to the warm climate, different scenery, and lifestyle. As financial advisors to ultra-high net worth clients, we find that U.S. residents who live in states with high tax rates are considering moving to Florida for not only those benefits, but also for tax reasons. Florida’s lack of a state income tax is a draw for U.S. residents, compared to New York, New Jersey, and California where someone could be subject to state, city, and possibly county taxes totaling 8%, 10% or even 12%, depending on where they live.
STEVEN: People from around the world view Florida, and the nation in general, as attractive in terms of prosperity, safety, and security. However, a move to the U.S. can result in unfavorable tax implications for the unprepared, especially if moving to the U.S. from places where rates are low, as in some Latin American countries. Not all countries impose inheritance or estate taxes. In contrast, the U.S. does impose estate and gift taxes, which can be very expensive, unless individuals prepare well in advance of a move. Given the complexity of the U.S. tax code and regulations, it is prudent to obtain financial planning guidance before, not after, relocating.
How is residency determined for domestic and international newcomers, and what factors are weighted most heavily?
MARK: For domestic and international transferees, it’s important to differentiate between domicile and residency, because each concept affects taxes differently. Domicile refers to a taxpayer’s permanent home. Domicile is also predicated on the taxpayer’s intent. I might reside in one state, but my domicile (primary residence) is elsewhere. If I own properties in multiple jurisdictions, I might use one for vacation, one for sometimes working remotely, and another for family gatherings, yet not consider any of those short-term residences my domicile.
This is important because my domicile state is where I file federal taxes and where I am taxed on all world-wide income (no matter where the income is sourced or earned). This is important because my domicile state is where I file the resident state’s income tax return (if any). In addition, the state income tax return may need to reflect my world-wide income (no matter where the income was sourced or earned). However, if I earned income in another state where I merely reside temporarily, I may have to file a non-resident income tax return in that state (to report income only sourced or earned in that state).
If a New Yorker relocates to Florida and stops filing New York State income tax compliance, it is likely that NYS Department of Taxation and Finance will ask detailed questions to determine the taxpayer’s new domicile for tax purposes. Federal and State taxing authorities have access to a variety of methods to determine where you are located in the country, including cell phone information, GPS devices, computer electronic records, banking transactions, and toll transponders. They also know where you vote, where your driver’s license was issued, positions taken in court proceedings, and state sanctioned exemptions (i.e. homestead election). Even the location of valuable tangible assets, such as art collections, pets, and family heirlooms, may be considered an indication of domicile.
For tax compliance, the location of your financial and legal advisors, doctors and dentists, and faith or charitable activities may indicate your domicile. All will be closely reviewed to determine where you spend your time. Proactive transferees take action to rearrange these before moving.
STEVEN: An individual is subject to U.S. federal income tax if he or she is considered tax resident of the U.S. An individual is subject to the U.S. federal estate and gift tax if he or she is domiciled in the U.S. The test of income tax residency is not the same as the test for estate tax domicile.
A U.S. tax resident is subject to tax on worldwide income. An individual is an income tax resident if he or she is a U.S. citizen, holds a U.S. green card or otherwise spends so much time physically present in the U.S. that he or she meets the substantial presence test. The substantial presence test is met if the individuals spends at least 31 days in the U.S. in the present year plus the total of the number of days spent in the present year, plus 1/3rd of the days spent in the previous year, plus 1/6th of the days spent in the prior year equals at least 183 days. In certain instances, exceptions to these rules may apply. For example, days spent in the U.S. as a student may not be counted for purposes of the substantial presence test.
On the other hand, an individual is subject to the U.S. federal estate and gift tax if domiciled in the United States. Generally, an individual is domiciled where resident and with the intent to spend the remainder of his or her life.
For those moving from abroad, residency vs. domicile are very important for income tax and estate and gift tax issues. If an individual should die after even a short time present in the U.S., the IRS uses a subjective test to determine what was in the decedent’s mind. The advice of a professional tax planner is essential to avoid surprises in this highly complex tax arena.
What actions do you recommend people take before making a domestic move? What tax strategies should foreign individuals consider before establishing U.S. residency?
MARK: For domestic moves, lifestyle and practical changes should start as soon as possible. Examples include changing driver’s licenses, vehicle and voter registrations, lining up a business address, and applying for homestead exemptions and homeowner’s insurance policies. Consider joining clubs, getting involved in religious congregations, and posting local activities on social media platforms. High net worth individuals with philanthropic connections to several places might increase their focus on Florida nonprofits. For some foreign-born people who want to aid their country of origin, it’s possible to set up a U.S. charity to benefit those back home.
STEVEN: The first thing international transferees should do is consult a tax advisor, because the U.S. tax code and regulations are complicated. They might be advised to place valuable stocks and other assets held abroad into trusts prior to relocating. This country’s tax structures can be confusing, and estate and gift taxes are expensive. But strategies exist to reduce or minimize taxes owed if planning is done in advance.
As individuals relocate, how would you encourage your clients to become involved in the local philanthropic community?
MARK: As professionals offering tax advice to extremely high net worth individuals migrating to Florida, we have a responsibility to bring up philanthropic opportunities and recommend charitable recipients. Our clients likely sit on the boards of charities and foundations and are familiar with Donor Advised Funds (DAFs). Moving one’s DAF to Florida is a strong indicator of domicile here. I encourage newcomers to get involved with The Miami Foundation to learn about it and many other organizations here. The Miami Foundation’s knowledge, gravitas, and community resources make it an outstanding advisor.
STEVEN: People who relocate to the U.S. from abroad can benefit from involvement in local charities, particularly as regards estate and gift tax issues. An advisor, when given all the client’s facts, might even say “now is not the time” and recommend a multi-year plan instead. Too frequently, people move first and ask questions later. By then, their legal expenses are often greater, and options are fewer.