Article by Liz Opalka, CPA | Featured on Journal of Accountancy
Migrating to a low-tax state to retire doesn’t always allow people to escape estate and inheritance taxes in the states they left.
As 2014 drew to a close, Florida finally pulled ahead of New York to become the nation’s third most populous state, following California and Texas. But retirees and others from northern states who take up residence in Florida and other sunny, low-tax states should not be surprised when their former home states are reluctant to see them go as taxpayers.
State domicile typically arises in the context of not only state income taxes, but also state estate or inheritance taxes. Currently, 19 states and the District of Columbia impose estate or inheritance taxes, or both, in addition to the federal estate tax. These taxing authorities generally reach nonresident estates owning real estate or tangible personal property within their borders. Florida, Texas, and Nevada don’t have income taxes or estate taxes.
For a retired snowbird, avoiding estate or inheritance taxes up north is not as simple as it would seem. Sometimes the individual didn’t cut enough ties to the old state, so he or she is still considered a resident.
Individuals should be aware that they can be considered to be a resident in more than one state although they will be domiciled in only one state. Domicile is defined as a person’s fixed or permanent abode that the person intends to remain in indefinitely and to which the person intends to return. Residency is a much more flexible term and may be defined differently depending on the state. For example, some states determine residency by looking at whether a person has a permanent place of abode in the state and lives in it a certain number of days in the year.
Just owning a vacant lot, other real property, or even tangible personal property located in another state can require a nonresident estate tax return to be filed, and the state exemption amount is often much lower than expected.