The idea of moving from a high-tax state to a low-tax one can feel like an absolute dream. Low-tax states like Florida, Texas, Nevada, and Tennessee offer sunshine, maybe a slower pace of life, and a little extra in your pocket at tax time.

This trend has become increasingly popular—especially since the pandemic made remote work the norm for so many people.

In fact, according to the Tax Foundation, in 2023, 24 of the 32 states with overall state and local tax burdens below the national average experienced net inbound migration, while 14 of the 18 states with tax burdens at or above the national average experienced net outbound migration.

In other words, Americans are leaving high-tax, high-cost-of-living states like New York, California, Hawaii, and Illinois for lower-tax states like North and South Carolina, Delaware, Tennessee, and Florida.

But here’s the catch: If you’re planning to pack up and move to save on taxes, there’s a chance the tax authorities in your current state won’t let you go without a fight.

You might even face a “residency audit” from your former state.

What is a residency audit?

A residency audit is when your old state’s tax department tries to prove you haven’t truly left for good—and that you still have an obligation to pay income taxes in the state. Essentially, they want to confirm that your move is legitimate and not just a tax-saving tactic.

For the state, residency audits are a way to avoid losing income tax revenue by forcing residents who move out of state to prove they’re no longer residents.

Going through a residency audit can be burdensome, intrusive, and document-intensive. They’ll dig into your life and ask you to prove that your new low-tax state is now your true home.

Common red flags that trigger a residency audit

Even with the best intentions, mistakes can happen, and these missteps can make auditors think you’re still tethered to your old state:

• Keeping a permanent home in your old state. You don’t have to sell property in your former state to establish residency in a new one—many people use their old home as a vacation home, rental property, or place for their children or other family members to live. However, you must be able to clearly show it’s no longer your primary residence.
• Moving to a low-tax state right before a significant taxable event. There’s nothing wrong with moving states or even moving from a high-tax state to a low-tax state. However, if you move right before a significant taxable event like selling a business or another large investment or receiving a hefty raise, your former state is more likely to examine whether you have, in fact, moved.
• Not spending enough time in your new state. While each state may have its own rules for determining whether you’re a resident, most states generally treat taxpayers as residents if they spend more than half of the tax year in the state. Most states consider half of the year to be 183 days (although that threshold might be 180 or 182 days in some states). All the time you spend in the state, including vacationing, visiting friends and family, and doing business, counts as days in the state, so track your time carefully to ensure you don’t exceed that threshold.
• Failing to move your financial life. You’ll have trouble proving you’ve changed your domicile if you still have a business or job, bank accounts, car registration, voter registration, and mail delivered to your old address.

Establishing residency for state tax purposes

To avoid getting stuck with an unexpected state income tax bill, you need to establish a new domicile, which is a fancy word for “your true, permanent home.” This isn’t just about getting a new driver’s license or registering to vote in your new state—although those are important steps. Tax auditors will dig deeper to see if you’ve really cut ties with your old state.

Depending on the state’s rules, it may determine residency based on domicile or use a statutory residency test. Domicile generally refers to the place you intend to make your permanent home. The statutory residency test is based on the number of days you spend in the state.

Sometimes, a state might decide you’re a statutory resident in a state other than your domicile. This results in dual residency and paying taxes on all your income in both states.

Half measures will leave you open to state income tax obligations in your old state, so here’s how to make your new state home sweet home in the eyes of the tax authorities:

• Spend more time in your new state. Spend over half the year in your new state to claim residency there. Auditors may look at travel records, expense reports, credit cards, phone bills, frequent flier statements, and similar documents to prove you were physically present in a particular location every day during the audit period. Talk about a pain in the neck!
• Move your important stuff. It’s easier to prove you’ve officially moved if you sell a house in your home state and move all your belongings to a home you purchased in a different state. But what if you’re renting in your new state or own property in two states? Move all your important belongings, including furniture, important documents, family heirlooms, and even pets. Basically, anything that proves you’re serious about making the move permanent.
• Consider your job location or active business involvement. Auditors will consider where you worked on a day-to-day basis, the location of your primary office, and your level of participation in managing a business. Some states have a “convenience” rule that sources income to the employer’s office location if you’re working remotely out of convenience and not out of necessity, which could lead to double taxation.
• Move your family. If you’re married and have minor children, the auditor will consider where they live and where your children are enrolled in school.
• Establish social and community ties. Auditors may consider whether you’re investing in your new community. Things like getting involved in local organizations, attending religious services, or joining clubs can help establish that you’re considered a resident in your new domicile. It’s also helpful to hire new advisors, like a tax preparer, attorney, or insurance agent in your new state.
• Update your addresses. This includes your mailing address, bills, bank accounts, safe deposit boxes, auto registrations, driver’s license, cell phone records, and estate planning documents. You’ll want to ensure everything important is tied to your new state.

Don’t wait for a tax residency audit—get professional advice now

Moving to a low-tax state can save you money, but it’s not as simple as changing your address. You need to carefully plan your move—especially if you’ve got a big financial event coming up.

States are on high alert when someone moves just ahead of a liquidity event, like selling a business, because they want income tax dollars to balance their state budgets. Planning ahead and working with a knowledgeable advisor is critical.

If you need advice, contact NewWay Accounting. We can help you decipher tax residency rules and file a nonresident return in your old state if needed so you can avoid any costly mistakes. Don’t wait until you’ve packed your bags—reach out to us before you take action.

Let’s chat and get you settled in your new home worry-free!