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Moving to a Different State? Keep these Things in Mind

July 10, 2023

MA residents…thinking of relocating to a different state to avoid high taxes? Understand the tax consequences of this move.

Have you read our blog, “Millionaires Tax” Approved in Massachusetts? Some high net worth individuals in the Bay State are considering moving to avoid the hefty tax. Here’s what you should know if you’re considering a move.

What is the “Millionaires Tax”?

As a result of the Fair Share constitutional amendment effective January 1, 2023, the tax rate on MA residents with income over $1,000,000 now includes an additional 4% surcharge. For taxpayers reporting more than $1,000,000 in MA taxable income (indexed for inflation each year) this means ordinary income and long-term capital gains will be taxed at 9%, while short term capital gains will be taxed at 16%.

Could moving out of MA reduce your tax bill?

Relocating your life outside of MA can certainly reduce or eliminate your tax bill, but before you move to the Sunshine State or skip over to the Granite State to avoid income taxes, you should understand the complexities of changing your domicile.

We are anticipating the MA Department of Revenue will be more aggressive in their audits of those changing their domicile. Taxpayers could be on the hook for Massachusetts income tax, even after moving away, if a state audit finds that tax avoidance was your sole purpose for moving. If you cannot substantiate that you moved your life, established residency in a new state, and relinquished residency in MA, you will be hit with a large tax bill that carries heavy penalties and interest.

A big misconception when it comes to the state tax law is that taxpayers can come and go as they please and are free to move without tax implications. For most taxpayers that might be true, but for many high-net-worth taxpayers, that lost tax revenue could trigger MA to scrutinize your entire life, spending habits, real estate and automobile portfolio, cell phone data, work history, etc. in order to prove that you have severed ties to MA sufficient enough to no longer be classified as a resident for tax purposes.

Simply changing your address, getting a driver’s license, or registering to vote somewhere else is not enough to say that you truly live your life in a new state. This is especially true for those that continue to maintain homes in Massachusetts and travel back regularly.

The tax impact of moving: 3 things to keep in mind

Simply staying away from MA for more than 183 days per year is not sufficient to claim a change in residency and domicile. Here are three things you should keep in mind:

1. A permanent change in domicile means that you have left Massachusetts with no intent to return to the state as a resident in the future. Don’t forget that any income that is still sourced to MA like rental income or an investment in a MA business will still be taxable in MA no matter where your residency.

2. If selected for audit, State auditors will request dozens of documents across all aspects of your life that paint the picture of where you truly call home, not just the address you put on paper. State audits can drag on for months, possibly years, and are expensive to fight.

3. Losing an audit could open up subsequent years to scrutiny, resulting in even more penalties and interest charges and additional fees for professional support. If you’re considering a move out of Massachusetts, make that decision based on what is best for you lifestyle, family, finances, or priorities and document that decision along the way.

Check out our blog, Relocating to a Different State? Here’s What You Need to Know for a deeper dive into the meaning of domicile and some tips for making the change.

If you’re in the midst of a change in domicile, KLR has resources to guide you.

Questions? Contact us.

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