Relocating to a Low-Tax State: How to Establish Tax Residency and Avoid Costly Audits
- 16 hours ago
- 4 min read
As more high-net-worth individuals look to preserve their wealth, relocating to a state with no income tax, like Florida, Texas, or Nevada, has become a popular strategy. In 2024, Florida alone gained more than 20,000 high-earning households, drawn by zero state income tax, business-friendly policies, and more favorable estate tax rules.
But while the tax benefits are real, successfully changing your state of residence isn’t as simple as buying a second home or spending half the year in a sunnier climate. States like New York and California are aggressively auditing relocation claims. If you're not careful, a tax move could backfire and result in substantial penalties or even seven- or eight-figure tax bills.
For Schulman Lobel clients, including entrepreneurs, entertainers, physicians, and family offices, these decisions carry real financial weight. Here's what you need to know to execute a tax-smart relocation that holds up under scrutiny.
Relocating to a Low-Tax State: Key Tax Residency Rules
Florida offers no state income tax, no estate tax, and no inheritance tax, and has moderate property and sales tax rates. For many, it’s the gold standard of tax migration.
Texas also has no income tax but relies heavily on property taxes, which are among the highest in the country. Business owners should also be aware of the franchise (margin) tax, which functions like a gross receipts tax on certain businesses.
Nevada offers similar tax advantages, including no income, estate, or inheritance tax, but offsets this with high sales taxes and cost of living, especially in metropolitan areas.
When evaluating a move, consider not just income taxes but also cost of living, business taxation, estate planning impact, and quality of life.
Relocation Isn’t Just Physical. It’s Legal and Strategic
States like New York use a two-part test in residency audits:
Statutory Residency – If you spend 183 days or more in New York and maintain a “permanent place of abode” there, you’re taxed as a resident even if you own a home elsewhere.
Domicile Test – This is more subjective and based on your intent. It looks at where your true permanent home is. Auditors examine your primary residence, business interests, location of your family and social life, and where your most valuable belongings are kept.
California uses a “closest connection” test and presumes residency if you spend more than nine months in the state during the year. It has also taken a proactive stance, often sending inquiry letters to people who still have ties to the state.
Auditors rely on cellphone records, credit card receipts, toll data, and even social media to determine where you actually live. Losing a residency audit can lead to retroactive taxation, penalties, and interest.
To establish your new state as your primary residence, and to remove taxing rights from your former state, take these steps:
Buy or lease a primary home in the new state that reflects your lifestyle and intent to stay.
Spend significantly more time in your new state than in your former one. While 183 days is the standard benchmark, many advisors recommend aiming for 200 or more.
Update all legal and official documents, including your driver’s license, car registration, voter registration, estate documents, bank accounts, and insurance policies.
Sever meaningful ties to your former state. This may include closing or renting out your old residence, switching doctors and attorneys, moving personal valuables, withdrawing from local clubs, and ending business operations when possible.
Document everything. Keep a detailed log of your whereabouts. Some states count even a few minutes in the state as a full day. Tools like Monaeo or a calendar with supporting documents can help.
Avoid major income events immediately after relocating. If you’re planning to sell a business or property, complete your move well in advance. Otherwise, your former state may claim you moved just to avoid tax on that transaction.
Common Mistakes That Cost Millions
Even the wealthiest individuals often make these preventable errors:
Keeping a luxury home in the old state and rarely using the new one
Spending too many days in the former state (even short visits count)
Leaving family members or valuable possessions behind
Filing inconsistent tax returns
Failing to track days or maintain proper records
These mistakes can lead to audits, surprise tax bills, and drawn-out legal battles.
Special Considerations by Client Type
Business Owners: Moving personally does not protect business income if operations are still based in a high-tax state. You may need to restructure the entity, relocate employees, or shift management to avoid creating nexus.
Entertainers and Athletes: Living in a no-tax state helps with passive income like royalties, but you’ll still owe taxes where performances or appearances take place. Income sourcing rules are key.
Medical Professionals: Continuing to work in your former practice, even part-time, can tie you to that state. A full transition—including licensing and business location—may be required.
Family Offices: Trust structures, asset locations, and estate plans should be re-evaluated during a move. Some states tax trusts based on the location of trustees or beneficiaries, so coordinated planning is important.
Final Thoughts: Plan Ahead and Follow Through
Relocating to a low-tax state can lead to meaningful savings, but only if you do it right. Many attempt to move on paper while maintaining ties that keep them taxed in their original state.
At Schulman Lobel, we’ve worked with clients in many industries to build relocation strategies that pass audit scrutiny. If you’re thinking about moving in 2025 or later, plan early and commit fully.
Don’t just relocate. Relocate the right way.
About the Author
Norman H. Schulman,
Managing Partner, CPA, Schulman Lobel LLP
Norm Schulman is the Managing Partner of Schulman Lobel LLP, with over 30 years of experience in accounting, tax, and business leadership. His background spans public accounting, including expert witness work in complex disputes, and over a decade as a CEO and CFO in private industry. He advises high-net-worth individuals, real estate clients, and professional practices.
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