BUSINESS LIFE | WINTER 2009/2010 EFFECT

Retiring South May Make Dollars
and Sense

by Sharon K. Gonwa

It is common for “snowbirds” from the Midwest to make the annual winter trek to the warm climes of southern states. Many of you may own second homes in these locations, yet continue to claim a northern state as your residence. While you may embrace the title of snowbird, you may not realize that establishing the title of resident could save thousands of dollars per year in state income taxes.

Each state has its own unique set of laws regarding income tax and establishment of residency. Let’s examine three popular winter destinations: Florida, Arizona, and Texas.

State income tax

It is generally the case that you pay state income taxes to your state of residence. However, Florida and Texas have no state income tax. These states also allow residents a homestead exemption on their main home for property tax purposes, which many of us find inviting. Other programs, like “Save Our Homes” in Florida, limit the amount of taxable value to the amount assessed when the home first became your permanent residence.

Arizona has state income tax from 2.59 percent to 4.54 percent of state taxable income and an average real estate tax bill equal to 1.3 percent of a home’s value. Arizona will also freeze your real estate tax property valuation if you are over 65 years of age and qualify as a resident for two years.

Establishing residency

Generally, to establish residency in a state, you must reside in that state for a certain amount of time and be able to prove that you live there. For example, in Florida you can file a declaration of domicile, register to vote in the state, and file for your homestead real estate tax exemption to help you earn resident status. Merely obtaining your driver’s license in the state will not necessarily qualify you as a resident, although it does show your intent to establish residency.

In Texas, things are stricter. To establish residency, you have to reside in the state for 12 continuous months, and your name must be on the deed or lease of the property you are claiming as your residence. Additionally, you need to do the following in Texas: purchase vehicle insurance and register for a license plate, get a driver’s license, and register to vote.

In Arizona, it’s a bit simpler. The Arizona Department of Revenue defines “resident” as “every individual who is in Arizona for other than a temporary or transitory purpose, and spends in aggregate more than nine months of the taxable year within Arizona.”

The down side

The down side of changing your permanent residence is you could lose the capital gains tax exclusion on your northern home if you have exceeded time limitation. As current law requires, your home must be your main residence for two of the last five years to take the exclusion. Of course, if your old residence no longer qualifies, your new one most likely will. Also, the annual income and property tax savings could more than compensate for the loss of the exclusion.

Therefore, if you’re contemplating a move south, take a moment and examine the tax ramifications of either keeping your current state residency or establishing yourself as a resident of your winter home. Many Northerners will find you can have substantial tax savings by changing your state of residency. The cash you save can make your winter down south that much more enjoyable.

As a former Wisconsin resident and a current resident of Florida, I understand the difficulty of making the decision to relocate and the importance of maintaining connections both professional and personal. When considering this decision and evaluating all the implications of retirement and residency, it’s comforting to move where you feel you have established relationships. Your tax advisor can help smooth the transition and determine if the benefits of relocating to Arizona, Florida, or Texas—or any other state you’re considering—outweigh the drawbacks.