The residency tax question and where you live

Newburg | CPA News Brief

November 21, 2022

With the passage of Question 1 on the ballot earlier this month, Massachusetts imposes a new law that adds an additional 4% to taxable income above $1 million (indexed for inflation moving forward), which creates a new 9% income tax bracket.

As the ink is still drying on the new legislation, we have received many questions regarding the impact residency in the state. In order to help answer some of those questions we wanted to provide this summary information to clients who might be considering a change in residency to avoid the increased tax bracket. Please note any change in residency is subject to audit by the state from which you are leaving and to which you are going. The below outline will help you understand what factors the states will consider when determining if your move is legitimate.

We do want to point out that the new law is applicable to taxable income over the threshold that is sourced to Massachusetts, regardless of residency. This income includes, but is not limited to: wages, self-employment income, taxable retirement distributions, investment income, and taxable gains on sales of residences and other properties. For example, the sale of a Massachusetts asset is taxable to MA no matter where you live, and income produced by a rental in MA will still be subject to MA tax if the owner’s residency is out of state.

Another consideration regarding a change in residency may be due to estate taxes at the state level. Currently Massachusetts only has a $1M estate tax exemption where other states piggyback off the Federal exemption of $12.06M for 2022.

The following is a checklist of actions/questions that will help prove that you have truly changed your residency status to another state:

Did you dispose of your former principal residence in your former state (by sale, gift)?
Maintain a calendar, log, or diary of the days spent in each state, and keep detailed records of travel itineraries, so you can prove when you were in the new state.
Ensure your employer W-2 is appropriately allocating your time/work (if applicable).
Obtain a new state driver’s license and surrender the license issued by your former state. Not all states require retesting if you have a valid license from another state. Often, only the hearing and vision tests are required in the new state.
Register your automobiles, boats, and other vehicles.
Apply for homestead exemption and cancel your previous resident state exemption.
Register to vote (and vote) in the new state and have your name stricken from the voting rolls of your former state.
Update estate planning documents (powers of attorney, revocable trusts, Wills) to reflect a change in domicile. Executing new estate planning documents in the new state will also ensure that such documents are in conformity with the new state’s law and avoid the potential adverse tax consequences of no longer applicable planning to minimize state estate tax.
List new state as your residence in all deeds and other documents.
Change the listed address on your passport to your new state residence.
Complete and submit IRS Form 8822 to notify them of the change in address if a tax form isn’t being submitted in the near future. Also, File federal income tax returns using your new address in the new state as your state of residence.
Open investment accounts in the new state. If you use a national brokerage firm, change to the local office of your brokerage from or begin to use a new local brokerage firm. Any new securities purchased should us the address of the new domicile, and any securities held by a brokerage firm should be transferred to the address of the new domicile.
Notify the Social Security Administration of your change of address.
Notify all creditors (e.g., credit card companies) and debtors of your new address and instruct all correspondence, bills and/or payments to be mailed to the new address.
Retain your detailed mobile phone records; they can be used to establish your location on any given day and are often subpoenaed by state tax auditors when the question of domicile arises.
If needed, open a safe deposit box in the new state.
Direct that all income, pension, dividend and interest checks and other payments be sent to your new address.
Use your new residence/address whenever possible (such as when registering at a hotel).
Become a member of a social country club located in the new state.