For many, the allure of the snowbird lifestyle is irresistible. Trading icy driveways for sandy beaches or frosty mornings for balmy afternoons is a dream for retirees and remote workers alike. However, whether youโre escaping the snow to bask in Arizonaโs sunshine or other temperate destinations, thereโs one thing you canโt escape: taxes.
Becoming a snowbird โ or winter visitor โ offers a host of lifestyle benefits, but it also presents unique tax considerations that must be navigated carefully. Hereโs what you need to know about the tax side of flying south for the winter.
Determining Your Tax Home
If you split your time between two states, you need to officially declare one as your primary state of residency for tax purposes. Your “state of residency” is where you establish your primary home โ often called your “domicile.” To choose and establish residency in a state, youโll need to take steps to demonstrate that itโs your true permanent home:
Spend Time There: Many states use the 183-day rule to determine residency. If you live in a state for 183 days or more in a year, it could automatically consider you a resident.
Sever Ties with the Other State: The state youโre leaving will look for signs youโve maintained ties that suggest youโre still a resident there. These might include keeping a driverโs license in that state or having affiliations with local institutions.
Establish New Ties: To show youโve officially “moved,” youโll need to build ties to your chosen state. This might include transferring your license, using a local address for bills, or registering to vote in your new state.
Minimizing State Taxes
When you live in one state but spend a significant amount of time in another, you may need to pay taxes in both, depending on where your income is earned. To minimize your tax liability, it’s essential to understand each state’s rules and reduce overlapping obligations.
For example, income such as wages, rental earnings, or business profits may be taxed in the state where it is generated, even if you are a resident elsewhere. This means that if you work in a state with income tax while maintaining residency in a different state, you could be liable for taxes in both locations. Many states allow taxpayers to claim credits for taxes paid to other states, which can help alleviate the burden of double taxation.
Additionally, check for reciprocal agreements between both states. These agreements can prevent double taxation on wages by allowing residents to pay income tax only in their home state, rather than in both states. However, not all states have such agreements, and the specifics can vary, so it’s crucial to verify the details of your particular situation.
Tax Implications of Property Ownership
Owning homes in multiple states comes with its own set of tax considerations, including:
Property Taxes: Some states offer property tax relief, like homestead exemptions, but you can typically only claim this benefit in your primary residence state.
Rental Income: If you rent out your secondary home while not using it, youโll need to report that income on your tax return to the state where the property is located.
Capital Gains Tax: If you decide to sell one of your homes during the tax year, the IRS allows for capital gains tax exclusions on the sale of your primary residence but not your secondary home.
Healthcare Considerations
Healthcare planning is another critical aspect of the snowbird lifestyle, particularly for retirees. While Medicare benefits are portable across the U.S., supplemental plans and provider networks may not be. Itโs important to ensure your supplemental insurance plan provides adequate coverage in both states where you reside to avoid unexpected out-of-network expenses.
Estate Planning Across State Lines
An often overlooked consideration of the snowbird lifestyle is the complexity of estate planning. Snowbirds need to be aware that different states have varying laws regarding estate taxes, probate processes, and the validity of legal documents. Working with an estate attorney can simplify multistate planning and ensures your heirs arenโt burdened with unnecessary taxes.
How to Stay Tax-Savvy as a Snowbird
To make the most of the snowbird lifestyle while avoiding tax pitfalls, consider these tips:
Document Everything: Keep meticulous records of your travel, financial transactions, and property ownership.
Work with Advisors: Consult with a financial advisor and tax professional who understands the nuances of multistate residency and snowbird living.
Review Regularly: Laws and regulations change. Schedule an annual review of your tax strategy, estate plan, and residency documentation to stay compliant and optimize your finances.
Take Control of Your Snowbird Journey
The snowbird lifestyle gives you the freedom to escape cold winters and enjoy warmer, sunnier destinations. However, it also requires careful tax and financial planning to ensure youโre not overpaying or inadvertently breaking tax laws. A trusted financial advisor can guide you through these complexities, helping you protect your wealth and focus on what matters most: enjoying your snowbird journey. Contact us to schedule a consultation and learn how we can help you navigate multistate tax rules, optimize your tax strategy, and make the most of your lifestyle.
