Tax Law

President Trump's Move To Florida Could Reduce His Tax Bill. Can You Do The Same?

If you plan to change residency for tax purposes, don’t expect it to be as easy as publicly tweeting your intention to move.

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(NICHOLAS KAMM/AFP/Getty Images)

On Halloween, President Donald Trump announced through Twitter that he is changing his permanent residence from New York to Florida. Maybe he wants to settle down in redder pastures in time for the 2020 election. Maybe the golf courses there are better.

Or maybe he is changing his residency to reduce his tax bill. Unlike New York, Florida has no state or city income taxes.

Many business owners when seeing this news will wonder, if Trump can save taxes by changing residency, can it work for me too? It might. But it would be helpful to understand how most tax agencies generally make residency determinations and whether the tax savings are worth the move. It should be noted that states have their own nuanced rules regarding residency, so consult a professional if you want to know more.

States tax their residents and nonresidents differently. In states with income taxes, a resident must pay income tax on all income no matter where it was earned. But those states can tax nonresidents only on income earned in those states. So people with high incomes from multiples states and countries can save a substantial amount of taxes by moving to a state with lower or no income taxes.

Wealthy people moving and changing residency for tax purposes is not unusual. However, high tax states like New York and California are aware of this and are very suspicious. Especially if the taxpayer still has businesses or immediate family members in the state or continues to have significant connections to the state. Wealthy people leaving these states have a pretty good chance of being subject to a residency audit. In many cases, the audit might not happen until several years have passed, which creates problems because records and memories can fade or be lost.

So how does one become a resident of a state for tax purposes? In most states, a taxpayer is a resident if they are “domiciled” in the state, meaning they have a fixed dwelling with intent to permanently stay in the state. Even if a taxpayer is not domiciled in the state, they are considered residents if they stay in the state for more than half of the year — usually 183 days or more.

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To determine where a taxpayer is domiciled, auditors look at the facts and circumstances to determine whether the departure is permanent or temporary. The first (and obvious) thing they look at is your home. They look at the amount of time spent there, whether family members live there, and whether important correspondence is sent there. They also look at other clues such as where the taxpayer banks, whether they obtained new driver’s licenses in the new state, where they are registered to vote, how tax returns are filed, and whether they obtained professional licenses in the new state. Auditors also look at whether the taxpayer joined any social clubs or organizations in the new state. Depending on the situation, some facts can be more important than others.

I have found that the difficulty with proving domicile is that it is mostly subjective. Also, some of the factors considered are obsolete. For example, some lawyers practicing federal law (i.e., tax, immigration) do not need to barred in the state to practice there. And as mentioned earlier, records can be lost. Because of this, sometimes it is hard to convince the auditor of your client’s side of the story. They might look at the evidence provided and create their own narrative explaining why the taxpayer is not domiciled in the new state.

The other way to determine residency is to show that the taxpayer has spent more than half of the year in the new state. In a residency audit, the auditor must be convinced that the taxpayer has spent less than half of the year in their state. While this test is more objective, the problem here is that even spending a portion of the day in a state is counted as a full day. So for a taxpayer who travels between two states frequently, it is possible that they can be a statutory resident in both states if he or she spends a portion of each day in both states for more than half of the year.

In President Trump’s case, his tweet implies that he was domiciled in New York and filed a New York resident income tax return despite living in the White House since 2017. Through the Trump Organization, President Trump has real estate holdings and other business ventures all over the world. This means that he stands to save millions in taxes by switching his residency to Florida. It is safe to assume he has planned accordingly or at least is ready for a residency audit from the New York Department of Revenue.

Can an average business owner achieve similar tax savings by changing their residence? It is possible, but average people have certain problems that the one percent do not.

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First, changing residency might not result in any tax savings. States can tax nonresidents on income coming from that state. If a small business owner from California moves to Nevada but still does business with his California clients, California can assess and collect income taxes on the revenue generated from the California-source income. If the California clients are the business’s primary source of income, then there will be little to no tax savings. The taxpayer will have find clients who are not California residents to minimize California’s income tax.

Second, the tax savings might not be worth it. Wealthy people like President Trump, in addition to avoiding substantial taxes, are likely to have no problems transitioning wherever they go. They can purchase a lavish house in a posh part of town. They will quickly and easily make business contacts without having to prove themselves or “pay their dues.” On the other hand, average people moving to a new state are likely to have to start from the ground up. They will spend more time getting to know the locals and establishing themselves. Most would think that saving a few thousand dollars (or less) in state taxes by moving to a new state is not worth having to start over.

Finally, most wealthy people spend considerable time and money preparing for the transition. Others do not. Instead, they read questionable articles on the internet where someone “beat the system.” Or they talk to a friend who knows someone whose brother’s drinking buddy paid no taxes by setting up something called an “offshore stealth blocker corporation” for his donkey urine-based energy drink business. And these people go with their “entrepreneurial gut,” which is code for praying that they won’t get audited.

If you plan to change residency for tax purposes, don’t expect it to be as easy as publicly tweeting your intention to move. First, you should check to see how much taxes you can save and whether that makes it worth moving, particularly in the long term. Second, have an exit plan as early as possible — this plan includes setting up contacts in the new state and cutting as many ties to the old state as possible. Finally, keep all records because you are likely to be audited, especially if you are wealthy.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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