Six Months and a Day...
“New data released by the U.S. Census Bureau showed that in terms of domestic migration — people moving about within the United States — Illinois saw roughly 105,200 more people leave than arrive.” Illinois Policy Institute, December 23, 2015
“…Illinois struggles to keep people here. They’re leaving, in droves, for states with sunnier economic opportunities.” Chicago Tribune, January 6, 2016
“By almost every metric, Illinois’ population is sharply declining because residents are fleeing the State.” Chicago Tribune, March 25, 2016
“Millionaires are leaving Chicago more than any other city in the United States on a net basis, according to a new report.” Chicago Tribune, April 4, 2016
This could be a piece on the demographic impact of cross-state migration . . . or of Illinois’s abject failure to address systemic economic problems . . . or the impact of personal wealth on economic mobility. These are all juicy issues, and worthy of debate. But instead of focusing on the causes or fixes to these problem issues, we’re going to look at one migration decision point – taxes.
As the articles quoted above suggest, many Illinoisans are hotfooting it simply to shed the anticipated economic burdens of remaining a resident. The companion question that crosses our desks with regularity is: “How do I become a Florida resident?” This inquiry is actually more often bluntly posed as: “How can I claim Florida residency so I can quit paying State income taxes?”
Florida is the featured destination in many of these discussions because it has no State income tax and no estate tax, and, well, it has better weather. However, Texas and Nevada also figure into these conversations for the same reasons. Neither South Dakota or Alaska have state income taxes, but in our office a conversation about moving to those States for the weather has yet to be had. This article will use Florida as the destination point, but feel free to substitute your own favorite State of exile.
Many Illinois residents now live in Florida for a significant portion of the year. Those individuals may remain Illinois residents or they may become Florida residents. We’ll share some factors to consider when determining what needs to be done when Florida residency is desired.
But first, it is important to understand the difference between “residence” and “domicile.” A person can have only one domicile, but any number of residences in different states. Domicile is defined as actual residence within a particular state combined with the intention of making that state one’s permanent home. In order to establish a new domicile, you must first abandon your old “domicile,” but not necessarily your old “residence.”
The law of domicile is unfortunately subjective, and sometimes the answers to domicile questions are not very definitive. The determination of domicile requires a factual finding of the intent of the individual, which has to be gleaned from the individual’s objective behaviors. There are numerous factors involved in this analysis, and with the exception of two factors discussed below, no one factor is clearly determinative of the result, but all of which taken together constitute the “the facts and circumstances” that are considered.
Recognize that Illinois is loath to see tax revenue disappear so it will often pursue domicile cases aggressively in an effort to continue to extract tax revenue from people who otherwise have cut most of their ties to the Land of Lincoln. To help provide some guidance in this murky arena, in April, 2013, the Illinois Administrative Code was amended to include a revised Section 100.3020 which is devoted to parsing when someone is – or is not – a resident subject to tax in Illinois.
A resident who is subject to income tax in Illinois is one who is either (1) in Illinois for other than a temporary or transitory purpose during the taxable year, or (2) who is domiciled in Illinois but is absent from Illinois for a temporary or transitory purpose during the taxable year. This definition subjects to taxation all people who are physically present in Illinois “enjoying the benefit of its government,” except those who are here temporarily, and excludes from taxation all people who, although domiciled in Illinois, are outside Illinois for other than temporary and transitory purposes.
If an individual acquires the status of an Illinois resident by virtue of being physically present in Illinois for other than temporary or transitory purposes, he or she remains a resident even though temporarily absent from Illinois. If, however, he or she leaves Illinois for other than temporary or transitory purposes, he or she ceases to be a resident. If an individual is domiciled in Illinois, he or she remains a resident unless he or she is outside Illinois for other than temporary or transitory purposes.
Obviously, a lot seems to hinge of this concept of being in Illinois (or being gone from Illinois) for “temporary or transitory purposes.” What does the Illinois Department of Revenue (IDOR) mean by this? Here’s the guidance the State offers:
“Whether or not the purpose for which an individual is in Illinois will be considered temporary or transitory in character will depend upon the facts and circumstances of each particular case. It can be stated generally, however, that if an individual is simply passing through Illinois on his or her way to another state, or is here for a brief rest or vacation or to complete a particular transaction, perform a particular contract, or fulfill a particular engagement that will require his or her presence in Illinois for but a short period, he or she is in Illinois for temporary or transitory purposes and will not be a resident by virtue of his or her presence here.
If, however, an individual is in Illinois to improve his or her health and his or her illness is of such a character as to require a relatively long or indefinite period to recuperate, or he or she is here for business purposes that will require a long or indefinite period to accomplish, or is employed in a position that may last permanently or indefinitely, or has retired from business and moved to Illinois with no definite intention of leaving shortly thereafter, he or she is in Illinois for other than temporary or transitory purposes and, accordingly, is a resident taxable upon his or her entire net income even though he or she may also maintain an abode in some other state.”
The Administrative Code provides some clarifying examples, one of which (with a marvelous editorial comment/warning embedded) seems particularly germane to the present inquiry:
“EXAMPLE 2. Until the summer of 1969, Y admitted domicile in Illinois. At that time, however, to avoid the Illinois income tax, Y declared himself to be domiciled in Nevada, where he had a summer home. Y moved his bank accounts to banks in Nevada and each year thereafter spent about three or four months in Nevada. He continued to spend six or seven months of each year at his estate in Illinois, which he continued to maintain, and continued his social club and business connections in Illinois. The months not spent in Nevada or Illinois he spent traveling in other states. Y is a resident of Illinois and is taxable on his entire net income…”. [Emphasis supplied.]
To provide something of a “bright-line” test, Illinois recognizes two circumstances in which an individual is presumed to be an Illinois resident, despite the possible presence of other factors to the contrary:
(1) An individual who accepts the benefit of homestead exemption for real estate tax purposes on his or her home will be presumed to be a resident of Illinois.
(2) An individual who is an Illinois resident in one year is presumed to be a resident in the following year if he or she is present in Illinois more days than he or she is present in any other state.
Logically then, Illinoisans who move to Florida may continue to be subject to Illinois taxes if they do not take steps to overcome the presumptions above. What follows below is a fairly typical and inclusive “laundry list” of the activities that would-be Floridians should embrace in order to build their case that they’ve abandoned their Illinois domicile for Florida:
- Purchase and establish a primary residence in Florida. Claim the Florida homeowner’s exemption.
- Dispose of any home in Illinois, and terminate any homeowner’s exemption in Illinois.
- Spend a significantly greater portion of each year in Florida – that is, be physically present there a majority of the time.
- Be physically away from Illinois for more than 183 nights (“six months and a day”).
- File a “Declaration of Domicile” in the Florida County of new residence certifying that you are a permanent resident of Florida. There are County-by-County differences so check your County’s website for the form currently in use and instructions for filing. (For example, the Broward County form can be found here: http://bcpa.net/Forms/domicile.pdf)
- Surrender your Illinois driver’s license and license plates.
- Obtain a new Florida driver’s license, register your car in Florida, and use Florida license plates.
- Obtain a new car title in Florida when you buy a new car.
- Register to vote in Florida, and vote in all possible elections in Florida.
- File your Federal income tax return with the District Director where Florida residents file their Federal income tax returns (either Austin, TX or Charlotte, NC) showing the new Florida address.
- Cease filing Illinois resident income tax returns (but see discussion below).
- Have a new Will/Trust drafted to comply with Florida law, and recite in its opening paragraph that you are now domiciled in Florida.
- Establish a business or commercial banking relationship in Florida.
- If applicable, arrange to have your Social Security checks direct deposited into a Florida bank account.
- Use your Florida address for all important purposes.
- Establish a stock broker relationship in Florida.
- Close your Illinois checking and brokerage accounts (or change your mailing address for your periodic statements to your Florida address).
- Consider opening a safe deposit box in Florida, and closing your Illinois safe deposit box.
- If applicable, obtain a burial plot in Florida.
- Develop a relationship with a Florida physician, and have your medical files transferred.
- Establish religious, social and professional relationships in Florida.
- Resign from (or change to non-residence status) for clubs, churches, and social organizations in Illinois.
All of these actions or activities have bearing on the ultimate legal question which is the emigrant’s intent to reside permanently in Florida. Though the first four are critical (because they address the two presumptions), no single other activity is of overriding importance, but the more “boxes you can check,” the more persuasive your argument.
If the two presumptions are not met, the Administrative Code indicates that an individual can still overcome the presumption of Illinois residency by providing adequate evidence to IDOR. If you have permanently moved to Florida, but are presumed to be an Illinois resident for a given year (if, for example, you are physically in Illinois for 7 months because of the requirements of work), you should file an Illinois return for that year because filing the return will enable you to avoid the imposition of penalties for failure to file, if it is later determined that you were, in fact, an Illinois resident for the year.
IDOR advises that the return should be marked as a nonresident return, though Schedule NR is not required. The return should exhibit the computation of net income as though the individual were an Illinois resident. However, instead of entering any tax liability, IDOR recommends the following statement: “No liability – nonresident.”
IDOR goes on to explain:
“The return should be accompanied by a signed statement indicating which presumption of residence the individual was subject to and setting forth in detail the reasons why the individual believes he or she was a nonresident for the taxable year. The return should also be accompanied by any evidence, such as certificates or affidavits, that the individual is able to obtain showing that he or she was a nonresident for the taxable year. If the Department is not satisfied that the individual was a nonresident, it will so inform the individual and provide him or her with an opportunity to submit additional information supporting his or her contention.”
While following the recommendations of IDOR may be useful in avoiding failure-to-file penalties, the very act of filing the return – sporting the “No liability - nonresident” proclamation – may simply invite IDOR scrutiny where none might have arisen absent the filing. You may be, in essence, self-selecting yourself for IDOR inquiry. This strategy should be discussed carefully with your tax return preparer.
While saying goodbye to the Illinois income and estate tax, and the State’s economic morass -- and its often brutal winters -- may have rich and obvious appeal for some, the selection of another State for retirement or relocation can be tangled by tax considerations.
If we can help with your analysis, feel free to contact any member of the Estate Practice Group at Goldstine, Skrodzki, Russian, Nemec and Hoff, Ltd.
For a robust discussion of these issues, please see “The Best States to Retire In From a Tax Perspective,” published by our friends at Balasa, Dinverno Foltz LLC. © 2015. This publication is available here [Registration at the BDF website required]: http://bdfllc.com/best-states-retire-tax-perspective/ For those interested in further reading in this regard, the cases Sweeney v. State of Illinois and Grede v. Illinois Department of Revenue are searchable online, and instructive.