What Michigan Snowbirds Need to Know if They Want to Fly Away From Michigan Taxes
As we say goodbye to another Michigan winter, plenty of folks, especially older adults, may want to make it their last one. Individuals considering or close to retirement often choose to spend their golden years in sunnier and warmer locales, at least during those harsh winter months. Two of the most popular destinations for Michigan “snowbirds” are Arizona and Florida. But it isn’t just unlimited sunshine and year-round golfing that draw scores of retirees to the desert or the beach. Arizona’s state income tax rates are significantly lower than Michigan’s, and Florida famously has no state income tax at all.
Plenty of people considering a move to those states for their tax advantages don’t want to abandon Michigan completely, ideally spending the nicer parts of the year here while seeking refuge in Arizona and Florida when the snow arrives. But what many winter refugees often fail to understand is that purchasing a house or condo in those states – even if they live there the better part of the year – does not automatically mean they can avail themselves of these favorable tax environments and avoid their Michigan tax obligations.
If you own or lease a home in Michigan and one in Arizona or Florida and split your time between the two, here is what you need to know and do to avoid an unpleasant and costly surprise come tax time.
“Domicile” Is What Matters
Michigan residents pay Michigan income taxes, Arizona residents pay Arizona income taxes, and Florida residents pay no income tax. But no matter how many residences you own in other states, you can only reside in one state at a time for tax purposes. That means you must establish that you are a “resident” of Florida or Arizona and not Michigan in the eyes of Michigan’s taxing authorities if you want to avoid Michigan taxes. And the key concept you need to understand about residency and which state’s tax laws apply to you is “domicile.”
“Domicile” doesn’t mean the same thing as “home,” “where we spend some time,” or “where we keep our stuff,” although those things do factor in when determining your residence. You are a resident of the state where your “domicile” is, and Michigan’s domicile definition governs whether or not you remain a Michigan resident subject to its taxation.
Under MCL 206.18, Michigan defines “domicile” as “a place where a person has his true, fixed and permanent home and principal establishment to which, whenever absent therefrom, he intends to return, and domicile continues until another permanent establishment is established.” That same statute provides that if an individual “lives in this state at least 183 days during the tax year or more than 1/2 the days during a taxable year of less than 12 months, he shall be deemed a resident individual domiciled in this state.”
So, if you spend more than half the year in Michigan, you are domiciled in Michigan for tax purposes. But the converse isn’t necessarily true. If you spend less than half the year here and want to claim you are no longer domiciled in Michigan, you need to prove that:
- You have a specific intent to abandon your old domicile in Michigan.
- You have a specific intent to establish a new domicile in another state.
- You are physically living in your new domicile.
You must submit proof of these elements along with Form 3799 – Statement to Determine State of Domicile to the Michigan Department of Treasury when seeking to change your domicile.
Establishing Residency in Another State for Tax Purposes
Courts and taxing bodies consider several factors when evaluating a taxpayer’s residency, specifically their claimed intent to establish a new domicile. While there is no magic formula for proving that intent, there are several things you can do to make the case that you no longer reside in Michigan, even though you may still own a house here or spend long stretches of time here (which you should try to avoid as much as possible).
The more of the following you can do, the more likely you’ll be considered a resident of Arizona or Florida for tax purposes:
- Own or lease a home there. You can’t be domiciled in a state unless you have a residence there. If you lease residential property in another state, the lease should be for at least 12 months to avoid any inference you are merely a seasonal resident and not a permanent resident.
- Spend more time there than you do here. The more time you spend in your claimed new domicile, the better.
- Calendar. Keep a calendar showing your location each day so you can show when you were in your new state of domicile each year and can prove your time outside of Michigan. Phone bills, utility bills, cell phone bills and credit card bills all may be indicative of where you were, so make sure the calendar is accurate.
- Use utilities there. Using utilities such as electricity, gas, and water can help provide evidence of time spent in your new domicile.
- Open bank accounts there. This change should be reflected on account statements, credit cards, and checks. If you have a safe deposit box, move it to a bank near your new domicile as well.
- Get a driver’s license there. Also, register any automobiles, boats, and airplanes there. Cancel prior Michigan registrations.
- File federal taxes from there. File federal income tax returns with the IRS using your new address and file a final individual income tax return in Michigan using your new address on the return.
- Join clubs there. If joining a country club or other social organization, do so in your new state. You can remain a member of such organizations in Michigan, but you should change your registration status to a non-resident if that is an option.
Other steps you can take to prove your new Arizona or Florida domicile include:
- Registering to vote there and canceling your Michigan voter registration.
- Applying for a Florida Homestead Exemption.
- Canceling your Michigan homestead exemption (Principal Residence Exemption.)
- Filing a Declaration of Domicile with the county where you will reside.
- Not claiming a discount available only to Michigan residents, such as in-state tuition for your children.
- Changing your address on insurance policies, credit cards, financial accounts, etc.
- Routinely visiting doctors and other professionals near your new home.
- Shift your church, synagogue or mosque membership to your new domicile and establish at least a nominal record of contributions to support the local church, synagogue, or mosque.
- Your estate planning documents should be amended to declare that you are a resident of your new state of domicile and that you wish the documents to be interpreted in accordance with the law of the new state.
- Make your new home the base from which you leave on extended trips and to which you return after the completion of a trip.
- Limit business and social activities in Michigan as much as possible.
- Change the address on your passport to the new address.
- If the subject ever comes up in discussions with friends or business acquaintances, adhere to the position that your new state of domicile is your home.
- If possible, dispose of your Michigan residence (by sale, gift to children, Qualified Personal Residence Trust, etc.)
Taking some or all of these actions does not guarantee that taxing authorities will accept your residency claim. None of the above indicia of local intention is controlling. But it can help you build a compelling case and increase the odds you’ll be free of Michigan income taxes. If your plans include buying or leasing a home in Arizona, Florida, or another state while still maintaining a residence in Michigan, contact Rob Kaplow at Maddin Hauser to discuss how best to position yourself for tax purposes.