Important Investment and Financial Planning Considerations when Relocating to Florida from the Northeast

Moving to Florida

Taxes affect many individuals’ decision where to live.  States in the Northeast have some of the highest income tax rates in the country and are likely to increase.  On the other hand, several states such, including Florida, impose no individual income tax.  Additionally, The Tax Cuts and Jobs Act of 2017 (TCJA) limits the State and Local Tax (SALT) deduction to $10,000 annually[1] through at least 2025.  While this change will not affect many low and middle-income filers, the tax implications for higher-income individuals are substantial.  As a result, many residents from the high-tax states in the Northeast are seriously considering changing their official residence and moving to Florida.  One of the questions that these residents face is how the move may impact their portfolio strategy.

Comparison of Several State Income Tax Brackets

Figure 1 below outlines the state income tax brackets of Connecticut, New Jersey, and New York vs. Florida.  A married couple filing jointly with taxable income of $500,000 per year could save approximately $30,000 per year in state income taxes if successful in relocating to Florida.

While moving to Florida may seem like a simple solution to lower an individual’s tax bill, avoiding the taxes of your original home state can prove much more difficult than one might expect.  Laws  around establishing domicile and tax residency can be complex (see “Domicile vs. Tax Residency: What is domicile and how do you change it?”).  Additionally, there are many other financial and investment considerations one should address when relocating and it is essential to consider the items outlined in this article whether it is moving to Florida or another State.

Review your Investment Portfolio

It is important to review your existing financial plan and investment strategy when making a move.  Most people move with the intention of a lifestyle change and their financial plans should be reviewed and updated to reflect these changes as well.  Your current investment strategy may not be optimal for your circumstances going forward and the asset allocation and risk profile of your investment portfolio may require changes.

Reviewing Fixed Income Strategy and Portfolio Risk

For starters, yield-oriented strategies may become more attractive when relocating to Florida.  Yield is defined as the income return on an investment, which is the interest or dividends received.  While qualified dividends are taxed at long term capital gains rates, most interest income is taxable as ordinary income and is therefore subject to ordinary income tax rates.

For an individual living in New Jersey and subject to the top marginal state tax rate of 10.75% and federal tax rate of 37%, this could amount to significant tax savings on interest income.  The benefit of tax savings and increased after tax yield can also help improve the risk profile of your investment portfolio.  For example, if a NJ resident subject to the top state and federal marginal tax rates is invested in a bond that yields 7%, the after-tax yield would be equal to 3.66%.  Alternatively, a Florida resident would only need to invest in a bond that yields 5.81% to achieve an equivalent-after tax yield.  This gives investors the ability to achieve the same after-tax return, while holding higher quality investments and reducing the overall risk in the portfolio.

Understand the Appropriate Municipal Bonds to Hold

Additionally, certain investments may no longer be appropriate depending on the state you live in.  One example would be municipal bonds.  If you own municipal bonds that are tax-exempt from your original home state, the benefit of owning those bonds may be reduced.  Because the tax benefit is so attractive, high earners tend to overweight municipals in their home state as part of their fixed income allocation.  This too can come with increased risks and investors could benefit from greater diversification within their fixed income allocations after relocating.  Diversifying away from your old home state also enables investors to broaden their opportunity set within the municipal asset class, potentially leading to higher yields in other states.

Review Timing of Triggering Capital Gains

Although capital gains qualify for favorable rates at the federal level, any gains, whether short or long term, will be subject to ordinary income taxes at a state level.  If you are planning a move to Florida, it may be wise to delay triggering capital gains where possible.  In addition, investors may want to consider tax loss harvesting strategies in advance of a move to offset any gains generated prior to the move.  Tax loss harvesting is the process in which an investor sells investments within a basket of securities at a loss, while simultaneously replacing them with different investments that have similar characteristics.  This enables the investor to maintain their market exposure and generate losses to help offset any capital gains.

Overall, there are several factors that can impact your investment decisions and a portfolio review when moving between states is recommended.  In addition, it is important to be aware of the potential tax changes proposed by the Biden administration, particularly a potential capital gains increase.  An increase in capital gains could make relocating to Florida even more attractive for high income earners.

Review your Current Estate Plan when Moving to Florida

When relocating to Florida it is important to review your estate plan and make sure everything is in order.  You may need to update your Will, trust documents, titling of your assets, as well as powers of attorney and health care directives.  These are common actions when moving to another state.

Estate tax and the probate process varies from state to state.  The Federal estate tax exemption amount for 2021 is $11.7 million per individual ($23.4 million for a married couple), but some states may have an additional state level estate tax.  For example, the exemption amount is currently $5.93 million for New York (and any estate in excess of $5.93 million subjects the entire estate to tax).  Connecticut exemption amounts increased to $7.1 million on January 1, 2021 and are scheduled to increase to $9.1 million on January 1, 2022.

New Jersey does not have an estate tax but does still assess an inheritance tax.  For this reason, it is important to update your Will and trust documents (where possible) as any reference to the laws of your previous home state can create complications.  If you own out-of-state property, such as your former residence, that you plan to keep or rent, having that asset held in a revocable trust or a limited liability company may help avoid estate taxes and probate costs.  Again, it is important to note changes in estate tax laws are likely to change under the Biden administration, most notably a reduction of the federal exemption to potentially as low as $3.5 million per individual ($7 million for a married couple).  If the new laws are to take effect beginning in 2022, planning in 2021 should be front of mind.

Named Executors and Other Issues

In addition to tax and probate matters, it is also important to review your named executors, powers of attorney, health care directives and trustees.  In some cases, out of state executors may need to post a bond to serve.  It can be much more time consuming and costly for someone who lives out of state to handle the logistics of an estate settlement.  Power of attorney designations and health care directives should also always be updated after a move to be consistent with the laws of your new state.  In most cases, power of attorney designations should remain valid in your new location, but some institutions resist or delay the acceptance of documents that do not conform to state statutory requirements or preferences.  Trustee selection may also warrant further consideration as many states determine “situs” based on the location of the trustee.  A trust’s situs refers to the jurisdiction under which the Trust is governed and often where it is subject to state taxes.

Prepare for the Event of a Tax Audit

If you are a high earner and you move to Florida, your chances of a residency audit will likely increase.  As part of the relocation process, it is important to be prepared in the event of an audit.  To protect revenue sources, states with high income tax rates may take extreme measures to keep affluent residents from moving their tax residence to another jurisdiction and the burden of proof lies with you, the taxpayer.  Remember, in a tax residency audit, the burden of proof is on the taxpayer to demonstrate a change of domicile.

Auditors are instructed to analyze your lifestyle, using five primary factors to determine where your domicile is actually located.  These five factors include:

  1. your home,
  2. active business involvement,
  3. time spent in each place,
  4. near and dear items of sentimental value, and
  5. family connections.

Below is a partial list of actions an individual can take to help pass the audit tests:

  1. spending more than half the year out of your prior state of residence (183 days)
  2. registering to vote in Florida and requesting removal from voter rolls in other states
  3. obtaining a Florida driver’s license and registering a vehicle in Florida
  4. moving personal (especially “near and dear”) belongings to Florida
  5. celebrating family holidays, birthdays, or other such events in Florida
  6. becoming an active member of local organizations like churches/synagogues, country clubs, wholesale clubs, etc.
  7. opening and regularly using accounts at a Florida bank branch
  8. reporting a Florida residence as one’s homestead for property tax purposes
  9. listing a Florida address on federal tax forms
  10. working with local professionals (i.e. Financial Advisors, Attorneys, and Accountants)

Each case is based on the particular facts and circumstances.  The more positive facts you can build for you case, the better the likely positive outcome of an audit.  Taking actions are important but documenting them is equally if not more important.

Conclusion: Planning a Move to Florida

The bottom line is that breaking free from high tax, Northeastern states takes much more than just acquiring a Florida address.  Before beginning to plan a move south, you should consult with a knowledgeable advisor.  The Wealth Advisors at Round Table Wealth Management, headquartered in Westfield, NJ with offices in New York City, and Boca Raton, FL have the experience and expertise to help clients navigate the numerous tax and financial issues that come with a relocation from the Northeast to Florida.  Round Table Wealth Management is experienced in advising high net worth individuals and business owners on all aspects of investment management and financial planning, including tax efficient investing, retirement planning, estate and wealth transfer planning, insurance, charitable giving, and business sale strategies. To learn more or speak with an advisor, please click here.

Footnotes:

[1] Not adjusted for inflation

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By |2021-06-09T19:04:15+00:00June 7th, 2021|Blog|0 Comments

About the Author:

Anthony Rosetti is a Director, Wealth Advisor at Round Table Wealth Management. Read Anthony's Biography >