29 Apr Should I have residency in N.J. or Florida to save on taxes?

Q. I am married and resident of New Jersey. Last year in March, we bought condo property in Florida. I also have a rental property in New Jersey and my house with a mortgage. We both are retired and have income from Social Security, a pension and Required Minimum Distributions (RMDs). What’s the best way to handle income taxes and for the future, what is the best way to handle residency?
— Trying to decide

A. Residency and domicile can make a big difference in your tax bill.

Before you make a decision, just remember that the decision on where to live should take into account more than just taxes.

Because you are currently living in New Jersey, you will have to file New Jersey taxes for this year, said Melissa Raimundo, a certified financial planner with Beacon Trust in Morristown.

She said the amount of income that will be reportable on your N.J. tax return will be your rental income, pension, and the amount of your Required Minimum Distribution (RMD).

Social Security income is not taxed at the state level in N.J.

New Jersey also allows for a pension income exclusion, which could possibly include all, or a portion, of your RMD.

“The 2020 amounts for the pension exclusion are $75,000 for single tax filers and $100,000 for those married filing jointly,” she said. “You can qualify for this exclusion if you are 62 or older as of Dec. 31, 2019, and your total income, line 27 on the NJ-1040, is $100,000 or less — not including Social Security income.”

Raimundo said Florida has a very compelling income tax status because there are no state and local income taxes in the state. So if you were to change your state of domicile to Florida, there would be no state income tax on your pension, RMDs or your Social Security income.

You would, however, still have to pay N.J. state tax on the income you make in N.J. Your N.J. rental income would be taxed in N.J., she said.

Apart from income tax, it should also be noted that N.J. has inheritance taxes whereas Florida does not, she said.

“In N.J., inheritance taxes are assessed based on relationship of the heir to the decedent and the amount inherited,” she said. “There is no tax on money left to spouses, civil union partners, direct descendants, direct ancestors or step-children, but there are taxes which range between 11% and 16% for other heirs such as siblings, sons- and daughters-in-law and others.”

Raimundo said there is certainly savings to be had by transferring your legal state of domicile from New Jersey to Florida, however, it is not as easy as just having a home in Florida and spending some time there.

You will have to establish intent to change legal domicile and proof of that intent.

She said domicile is defined as “a person’s fixed, permanent, and principal home that they reside in, and that they intend to return to and/or remain in.”

You can begin to establish domicile by finding a permanent residence in Florida, which you seem to have already accomplished with your new condo purchase.

Raimundo said you may also want to consider either selling or downsizing your New Jersey residence.

“If you plan to split time between the two states, you must be able to show proof that you are spending the majority of your time in Florida, which is 183 days or more to fulfill the domicile requirement, and avoid being classified as a statutory resident of N.J.,” she said. “While the terms residence and domicile are often used interchangeably, in the eyes of the law, they are different.”

If you establish domicile in Florida, but then spend 184 days or more in New Jersey, you may be deemed a New Jersey resident, and then be subject to N.J. taxes and tax laws. That’s why it’s important for you to keep a calendar and a record of the days spent in each state.

“You should update your driver’s license and ensure that any and all legal documents are updated to reflect your new state of domicile. This should include any trusts, wills, medical items, as well as your tax returns,” Raimundo said. “The more of your daily life and activity that you transfer to Florida the easier time you will have proving your intent to establish domicile.”

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This story was originally published on April 28, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.