Moving to a Lower-Tax State: How State Residency and Domicile Rules Work

Presented by LTax

They say that the grass is always greener on the other side of the fence. For residents of high-tax states, that might be especially so if the “green” represents significant savings.

For example, Florida does not impose a personal income tax, and no Florida estate tax applies to decedents who died on or after January 1, 2005. For a household leaving a higher-tax state, moving there may be tempting because it could meaningfully change the long-term tax picture. However, realizing those potential savings generally depends on details that are easy to overlook, including whether the move holds up if the former state challenges it, how income tied to the former state is treated, and how the timing of the move lines up with major financial events.

At Lido Advisors, these questions often surface first in planning conversations, which is why we approach relocation through Lido One. Lido One is built on a foundation of planning and brings tax consulting and preparation, investment management, estate planning, and financial planning together into a single, coordinated strategy. For a client weighing a move, that coordination can help align the relocation date with bonuses, equity vesting, business sales, retirement distributions, and estate documents, so that any decision about whether or where to relocate can be made with its impact across the financial landscape in view.

This Perspective explains how states generally determine residency, which types of income a former state may continue to tax, and what our tax specialists often review with clients before and after a move.

What a State Move Can and Cannot Change

A change of residency affects state taxes. Federal income, estate, and gift tax rules generally apply the same way regardless of which state a taxpayer calls home, so moving does not by itself change the federal tax cost of a Roth conversion, an equity vest or option exercise, or a required minimum distribution.

Even so, the state-level difference may be substantial for some households, particularly those with high incomes, large retirement account balances, or a planned liquidity event. The table below shows examples of high-income tax provisions in several states, based on each state’s published guidance.

Sources:

California: California Franchise Tax Board, 2025 tax rate schedules; California Franchise Tax Board, SB 326 legislation

New York: New York State Department of Taxation and Finance, 2025 IT-201 instructions

New Jersey: New Jersey Legislature, bill text for the 10.75% rate

Massachusetts: Massachusetts tax rates; Massachusetts Department of Revenue, 4% surtax on income over $1 million

Maryland: Maryland Comptroller, Tax Bulletin 58 (Dec. 29, 2025)

Washington: Washington Department of Revenue, tiered capital gains tax rates; Washington Legislature, Bill 6346 summary

Rates, thresholds, and scheduled changes can shift from year to year, and proposed measures, including ballot initiatives, could change them before they take effect.

Domicile and Statutory Residency Are Separate Tests

How do states determine who counts as a resident for tax purposes? Most states do it by categorizing taxpayers in one of two ways.

Domiciles Residents

Domicile is generally the place a person regards as a true, fixed, and permanent home, the place to which they intend to return when away. A person may have several residences but only one domicile, and changing it generally requires both an actual move and the intent to make the new location a permanent home. New York’s Nonresident Audit Guidelines note that a tax motivation for moving is immaterial, provided that intent is fixed and the taxpayer’s actions confirm it. For someone leaving New York, the burden of proving the change generally rests on the taxpayer.

Statutory Residents

A person who is not domiciled in a state may still be taxed as a resident under a separate statutory test. In New York, for example, a person who maintains a permanent place of abode in the state for substantially all of the year and spends 184 days or more there is generally treated as a resident, and presence for any part of a calendar day generally counts as a day in the state. As a result, a person can be domiciled in a new state and still be taxed as a New York resident if both the home and day-count tests are met.

How a Former State May Evaluate a Move

States generally look beyond paperwork to where a person’s life is actually centered. New York’s guidelines direct auditors to five primary factors: home, active business involvement, time, items “near and dear,” and family connections. California’s residency guidelines list similar factors, including where a taxpayer’s spouse and children live; where their doctors, dentists, accountants, and attorneys are located; where they bank and where their financial transactions originate; and where they belong to places of worship, professional associations, or social clubs.

Formal steps, such as obtaining a new driver’s license or registering to vote, still help build a consistent record, though they generally carry less weight on their own. New York’s guidelines cite a case in which a declaration of domicile, voter registration, and a driver’s license were found less persuasive than the taxpayers’ general habit of life. Keeping a former home generally does not, by itself, prevent a change of domicile, though auditors will likely look at how the home is used after the move.

The Transition Year

In the year of a move, a taxpayer generally files as a part-year resident in the former state. California, for example, taxes part-year residents on all income received while a resident, plus California-source income received while a nonresident. The practical challenge is dividing the year correctly, especially for income earned in one period but paid, vested, or recognized in another.

A specific, documented changeover date, supported by consistent records, can make that division easier to support. Helpful records may include closing documents, moving invoices, utility start and stop dates, and a contemporaneous calendar of where each day was spent. New York’s guidelines note that auditors may request items such as credit card receipts and phone bills to confirm where a taxpayer was during a given period.

Income a Former State May Continue to Tax

A completed change of residency generally ends a former state’s ability to tax a person’s worldwide income as a resident. However, the former state may still tax income it considers sourced there. Retirement income is a notable exception: federal law generally prohibits states from taxing the retirement income of individuals who are not residents or domiciliaries, including distributions from qualified plans and IRAs. Because residency is determined under the former state’s own laws, that protection generally depends on the move itself holding up.

Deferred and Equity Compensation

Bonuses tied to service performed before a move, and deferred compensation that falls outside the federal protection, may remain taxable by the former state. Stock options, restricted stock units, and similar awards raise a similar issue, because they often relate to service performed over several years. California, for example, generally allocates income from equity-based compensation based on the portion of the relevant service period that the employee worked in California, so a vest or exercise after a move may still be partly taxable there.

Remote Work

Some states, including New York, apply a “convenience of the employer” rule. The rule generally turns on where the employee’s assigned office is located. Under New York’s approach, a nonresident whose primary office is in New York, including at a New York office of a national company, may have days worked from home out of state treated as New York workdays, unless the home office qualifies as a bona fide employer office under the state’s criteria. For employees who relocate while keeping a job tied to an office in a state with this kind of rule, a move alone may not change how wages are sourced.

Business Interests and Real Estate

Income from real property and businesses located in a former state is generally taxable by that state regardless of where the owner lives, and, depending on the state and type of property, payments on an installment sale made while the seller was a resident may remain taxable there after a move. Owners of S corporations, partnerships, and LLCs may also need to continue filing nonresident returns in the states where their entities operate.

Timing Considerations Around a Move

When planning a move to a state that does not tax personal income, the timing of large income events may affect the state tax result.

• Roth conversions. Converted amounts are generally included in gross income for the year of the conversion. A conversion completed after a change of domicile may not be subject to the former state’s income tax, while one completed before the move generally would be.
• Capital gains. Gains on stock and similar investments are generally sourced to the state where the taxpayer lives at the time of sale, so gains recognized after a residency change may no longer be subject to the former state’s income tax. Gains on real estate located in the former state, however, generally remain taxable there.

For these reasons, significant transactions generally benefit from review before both the transaction and move dates are set.

Estate Planning After a Move

Several states impose their own estate taxes, often with exemptions well below the federal basic exclusion amount of $15 million for 2026. New York’s basic exclusion amount is $7,350,000 for 2026, Massachusetts requires an estate tax return for estates of more than $2 million, and Washington also imposes a state estate tax.

State estate taxes generally follow domicile at death, so an unresolved domicile question can carry into estate administration, and some states, including New York and Massachusetts, may require a nonresident’s estate to file if the decedent owned real property there. A move is also a natural time to have an estate planning attorney review wills, trusts, powers of attorney, and health care directives, since these documents are governed by state law and may not operate as expected in a new state.

Snowbirds and Part-Time Residents

Keeping homes in two states can create ambiguity in a residency review, because the retained home may support both a domicile claim and, in states such as New York, a statutory residency claim. For part-time residents, a few habits may help:

• Keep a contemporaneous, day-by-day location log, along with records that corroborate it, such as travel records and credit card statements.
• Keep licenses, registrations, voter records, banking relationships, and mailing addresses consistent with the claimed domicile.
• Give extra attention to documentation in years near a day-count threshold.

Pattern matters as much as totals. New York’s guidelines note that a retiree who moves south and returns to New York for the summer behaves consistently with a change of domicile, while a shift from six to seven months per year in the southern home would not, by itself, be strong evidence of one.

Planning a Move With Lido

A relocation touches tax, investment, and estate decisions at the same time, and the order in which those decisions are made can shape the result. Through Lido One, our tax specialists work alongside your advisor to review residency timing, income sourcing, upcoming transactions, and estate considerations as part of a single plan. If you are considering a move, contact our team to start that conversation well before the move date.