Things to Consider Before Moving to a Low- or No-Tax State

Year-round sunshine and warmth aren’t the only reasons people in high-tax states like Maryland and DC relocate to places like Florida. For many, tax savings considerations play a major role in their decision to relocate to a new state. High income earners who make millions of dollars every year are turning over a hefty portion of their earnings to high tax states. That taxpayer can potentially save a lot of money by moving to a no-income tax state like Florida.

Evaluate Tax Savings Resulting from a Change In Domicile

For instance, a 50-something hedge fund manager recently moved his residence and business from New Jersey, which has a top tax rate of 10.75%, to Florida. This move to a no-tax state will likely save him millions. On the flip side, the move is a major hit to New Jersey’s economy, resulting in millions of dollars in lost tax revenue.

In many cases, the annual tax savings from moving to a low- or no-tax state can pay the mortgage on a new home. In fact, if a taxpayer has a major tax event like the sale of a business or a large amount of publicly traded stock with large gains, the taxes saved in one year can buy the new family home.

But before you pack the moving van, there’s a long list of things to consider. When one of my clients asks if they’d reduce their state tax bill by moving to a low- or no-tax (Florida, Nevada and Texas) state, I make sure they understand what a “change in domicile” entails from a tax perspective. Once they consider all of these factors, they can make an informed decision as to whether it makes sense to relocate.

What Does a Change In Domicile Entail? 

To change residency, for example, from Maryland to another state, you must have evidence of abandoning your Maryland domicile and adopting a new domicile.

“Domicile” is a question of intent. It is established by your intention to treat a place as your true, fixed and permanent home. However, your intent to treat a place as your domicile is not enough. You must take specific actions to change you domicile. You have to sever ties with one jurisdiction and establish those ties in the new jurisdiction.

In Maryland, once a domiciliary status is established, you retain that domicile unless evidence affirmatively shows an abandonment of that domicile, along with an adoption of a new domicile.

In deciding whether you’ve abandoned your previous domicile and acquired a new one, courts will examine and weigh the factors relating to each place. While Maryland’s courts have never deemed any single circumstance conclusive, state authorities have considered certain factors as more important than others. Among the most important is where the person actually lives.

As a guideline, Maryland established the following criteria to determine whether a change of domicile has occurred:

1. Home

• What residences are owned or rented by the taxpayer?
• Where are the residences located?
• What is the size and value of each residence?

2. Time

• Where and how does the taxpayer spend time during the tax year?
• Is the taxpayer retired or actively involved in a business, occupation or profession?
• How much does the taxpayer travel during the year and what is the nature of the travel?
• What is the overall lifestyle of the taxpayer?

3. Items near and dear

• What is the location of the items or possessions that the taxpayer considers: (1) “near and dear” to his or her heart, (2) of significant sentimental value, (3) family heirlooms and (4) collections of valuables?
• Where are the possessions that enhance the qualities of one’s lifestyle?

4. Active business involvement

• How does the taxpayer earn a living?
• Is the taxpayer actively involved in any business ownerships or professions?
• To what degree is the taxpayer involved in business ownerships?
• How does this compare to business interests outside of the state?

5. Family connections

• Where does the remainder of the taxpayer’s family live?
• Where do the minor children attend school?
• Where are the taxpayer’s social, community and religious ties?

6. Other factors

• Where the taxpayer’s automobiles are registered
• Location of bank accounts and safe deposit boxes
• Where the taxpayer receives mail and votes

Though not required to establish an abandonment of a domicile, we recommend that clients sell their residence and purchase a new one in the no-income tax state. The first $500,000 of gain from the sale of any residence is not subject to tax if at the time of sale the property was their principal residence for two of the prior five years. If the residence is not sold within three years after the change of domicile, all of the gain from the sale would be subject to tax.

One last factor in the decision is understanding that states are desperate for revenue from income tax and will potentially scrutinize your abandoning state residence. This is especially true if, despite doing all of the little things like changing your voter’s registration, bank accounts and driver’s license, you do not sell your family’s primary residence. Without this key change, you are certainly helping the state challenge your abandonment of your residence in the old state.

As you can see, there are a lot of factors that play into the decision to relocate to another state to save taxes. First and foremost, consider whether your move qualifies as a change in domicile.

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This article was originally published in 2016 and was updated with new information in 2024.