State Residency Planning: Moving to Lower Your Tax Bill

If you've recently sold a business, inherited significant assets, or are approaching a large RSU vest, the state listed on your tax returns could be costing you more than you realize. State residency planning is one of the most powerful-and most misunderstood-tools available to high-net-worth individuals looking to keep more of what they've earned.

Start Here: Can Moving Actually Cut Your State Income Tax Bill?

The spread between high tax states and no-income-tax states is staggering. California's top marginal rate sits at 13.30%, and when you factor in additional surcharges, effective rates can climb to roughly 14.4%. New York's top state income taxes reach 10.90%-and if you live in New York City, add another 3.876% on top of that. Meanwhile, Florida, Texas, Tennessee, and South Dakota charge zero individual income tax on wages and investment gains.

Here's what that looks like in practice:

Those aren't rounding errors. According to the Tax Foundation's 2024 state rate data, 43 states plus D.C. levy some form of individual income tax, while seven states impose none on wage income. For taxpayers at the top of the bracket, the savings from a legitimate residency change can fund a decade of retirement spending or a transformational charitable gift.

But here's the catch: simply buying a home in a new state or spending fewer than 183 days in your former state is not enough for tax purposes. Living fewer than 183 days in a state may not suffice to sever your tax residency there. States use overlapping concepts-domicile, statutory residency, day-count thresholds, and sourcing rules-to determine who owes what. Getting any of these wrong can mean paying state income tax in two states instead of one.

At Third Act Retirement Planning, we help clients plan residency changes as part of a holistic retirement, tax, and legacy strategy. Our approach is grounded in stewardship and biblical wisdom: we believe that using every legal tool to minimize tax drag frees more resources for family, generosity, and purpose-driven living.

Before you start packing, ask yourself these questions:

• When are your major liquidity events (business sale, RSU vest, inheritance) expected?

• Which state currently claims you as a resident or domiciliary?

• Where do you genuinely want your primary residence long-term?

• Is your family-including your spouse and minor children-willing and able to relocate?

• What community, church, and social ties will you need to rebuild?

Understanding Tax Residency: Domicile, Residence, and Statutory Residency

For individual income tax purposes, state tax residency hinges on two distinct concepts: domicile and statutory residency. These are not the same thing, and understanding the difference is essential before making any move.

Domicile is your true, permanent home-the place you consider your fixed, long-term base and intend to return to whenever you're away. You can have only one domicile at a time for tax purposes. Your domiciliary state generally claims the right to tax your worldwide income, regardless of where that income is earned.

Residence, by contrast, simply refers to any place you live or stay. You can have multiple residences across several states-a vacation condo in Colorado, a pied-à-terre in Manhattan, a lake house in Michigan-without any of them being your domicile.

Statutory residency is a separate mechanism many states use to claim you as a tax resident based on physical presence plus maintaining a permanent place of abode. New York's rules are among the most well-known: if you maintain a dwelling suitable for year-round use and spend more than 183 days in the state during a tax year, New York treats you as a statutory resident and taxes your worldwide income-even if your domicile is elsewhere. Most states require physical presence for at least 183 days before triggering these rules, but the details vary significantly.

States like New York impose taxes based on physical presence combined with having a permanent place available. States may also tax income earned within their borders even if you're not a resident at all. That means you may live in more than one residence, but you still must establish your tax home ties in one state-or risk your old state maintaining its claim.

Here are a few scenarios that illustrate how dual taxation can arise:

• You establish a Florida domicile but keep a furnished apartment in New York and spend 190 days there. New York will treat you as a statutory resident.

• You move your domicile from California to Texas but vest RSUs tied to work performed in California during the grant-to-vest period. California will tax the portion of that income attributable to in-state workdays.

• You relocate to Tennessee but leave your business office, employees, and primary clients in your former state. That state may source your business income to its jurisdiction.

• You claim South Dakota residency but your spouse and minor children remain enrolled in a New Jersey school district. Auditors will question whether your domicile ever truly changed.

Courts consistently place the burden on the taxpayer to prove a change in domicile with convincing evidence. States aggressively audit high-income taxpayers around big liquidity years, and living fewer than 183 days does not guarantee tax residency change on its own for state tax purposes when they evaluate a claimed move.

What Really Determines Your State for Tax Purposes?

No single factor proves your tax residency. There is no magic document, no one domicile declaration that settles the matter by itself. Instead, states focus on the totality of circumstances-examining where your life actually happens, day by day.

Residency audits often focus on social and community ties, financial and lifestyle connections, and documentary evidence. Here's what auditors in high tax states like California and New York typically examine:

Family and personal life:

• Where your spouse and minor children live, attend school, and socialize

• Where your personal property of sentimental value is kept-heirlooms, artwork, family photos, pets

• Where you vote and where your driver's license is issued

• Your social ties: church attendance, friend groups, community involvement

Financial and professional connections:

• Location of primary bank accounts, brokerage accounts, and financial records

• Where your business operates-offices, employees, clients

• Your medical providers: primary care doctor, dentist, specialists

• Your CPA, attorney, and other professionals

• Country club, gym, and professional association memberships in your old state versus your new state

Documentary evidence:

• Address on federal and state tax returns, W-2s, and 1099 forms

• Legal documents: trusts, wills, powers of attorney reflecting which state's law applies

• Insurance policies and homestead or primary residence property tax exemptions

• Homestead exemptions may be available for residents in some states, and applying for one supports your claim

Social ties can influence residency claims during audits-sometimes more than you'd expect. As the Wall Street Journal has reported, auditors may review social media posts, credit card statements, and even cellphone location data to determine where you actually spend your time spent.

Some states use explicit day-count rules. New York's 183-day threshold plus a permanent place of abode triggers statutory residency. You must prove your new domicile with evidence, and taxpayers must prove their residency change with clear evidence across all these categories-not just one. Document any moves between states with a detailed log of days spent in each location, using calendar apps, travel records, and credit card receipts.

Think of this list as a self-audit. If an auditor looked at your life on paper, would your old state or your intended new residence look more like your true home?

Planning the Move: How to Change Your State Residency Intentionally

A residency change is a project, not a single event. Ideally, the move should be completed well before a major income year-before a 2026 business sale, a large RSU vest, or a significant Roth conversion-so the right state claims the income on the right date.

Plan with a timeline:

• Choose a target move date and work backward from anticipated liquidity events

• Secure housing in the new state before the move date

• Coordinate employment or business arrangements so income earned after the move clearly ties to the new state

• Check how states tax retirement income like Social Security or pensions during residency changes, especially if you're approaching retirement age

Establish domicile in the new state:

• Buy or lease a new residence that will serve as your primary residence-larger or more central to your daily life than any other dwelling

• Move your family and life items: furniture, heirlooms, pets, vehicles

• Enroll children in local schools

• Find a local church or home congregation

• Establish social ties in your new state for residency claims-join community organizations, volunteer, build friendships

• Move financial accounts and professional ties to your new state: banks, brokerage accounts, CPA, attorney, medical providers

Sever ties with your former state:

• Sell your former primary residence or convert it into a genuine rental property managed by a third party

• End or significantly downgrade club and gym memberships in the old state

• Move safe deposit boxes, valuables, and important personal property

• Change your primary mailing address on all financial records and legal documents

• Cut ties with your old state to avoid dual taxation-this means more than just forwarding your mail

Documentation and legal steps:

• Obtain a new driver's license and vehicle registration within weeks of arrival

• Register to vote and actually vote in local elections in the new state

• File a declaration of domicile or homestead application-establishing a Florida domicile, for example, involves filing a Declaration of Domicile with the county clerk

• Some states require a declaration of domicile to establish residency formally

• Update estate planning documents after moving to reflect new residency laws-wills, trusts, and powers of attorney should reference your new state's law

• Document your move with leases and utility bills; documenting your new residency is crucial to avoid audits

At Third Act Retirement Planning, we often build a "residency change file" for clients: a comprehensive folder containing leases, closing documents, utility statements, travel records, professional change-of-address confirmations, and updated legal documents. Establish a clear legal domicile to reduce tax liability when changing residency-this file becomes your evidence if a former state ever comes knocking.

Avoiding Dual Tax Liability: Common Traps When Leaving a High Tax State

High tax states devote significant audit resources to retaining taxpayers-especially claiming residency from those who move to lower tax rates right before recognizing a large capital gains tax event, exercising stock options, or receiving an inheritance. High-tax states aggressively enforce residency rules for former residents. States typically audit new residents who move to lower-tax jurisdictions, and the year of a major liquidity event is when red flags are most likely to draw scrutiny from a tax appeals tribunal or audit division.

"Half-move" behaviors that trigger audits:

• Keeping your old home fully furnished and available for personal use-this looks like a permanent place of abode

• Hosting holidays, family gatherings, or social events in your former state

• Posting on social media from your old state while claiming new state residency elsewhere

• Maintaining ties to your former state increases audit risk significantly

Day-count mistakes:

• Spending more than roughly 183 days in your former state in a calendar year is a classic trigger

• Some states count any portion of a day as a full day-track week numbers and overnight stays carefully

• Use apps or spreadsheets to log days spent in each state; casual estimates won't hold up

Lingering ties that suggest continued residence:

• Not updating your driver's license or voter registration

• Keeping your primary physician, dentist, and club memberships in the old state

• Continuing to list your former address on bank, brokerage, or insurance accounts

• Adverse taxes can occur if one claims residency in a different state than where they work

Nonresident and part-year filing:

• Even after you establish domicile in the new state, your former state may still tax in state income sourced there: rental property income, wages for work performed in that state, or equity compensation allocated based on service-period days

• Taxpayers may owe taxes in multiple states simultaneously-file part-year and nonresident returns correctly to avoid penalties

• High-tax states look for closer connections to justify tax claims on residents who have allegedly left

Properly executed residency planning can substantially reduce your total tax liability. Sloppy execution-leaving a trail of old-state connections while claiming residency elsewhere-can result in years of back taxes, penalties, and interest from tax authorities in your former state.

Special Issues: Equity Compensation, Business Owners, and Remote Work

Windfall events-selling a business, exercising ISOs or NSOs, large RSU vests-are exactly when high tax states scrutinize tax residency the most. States may tax income from sources within their jurisdiction regardless of where you live, and equity compensation creates some of the most complex sourcing issues.

Equity compensation (RSUs, options):

• California allocates RSU income based on workdays spent in state during the vesting period. If you were granted RSUs while working in California, then moved to Texas, California will still tax the portion tied to California workdays. For example, on a $3M RSU vest where 60% of service-period days were in California, expect roughly $239,000 in California state tax on that allocation alone.

• Options granted while working in New York can remain partially taxable there even if exercised after moving to Florida or other states.

• Detailed travel records and workday logs by state are essential-your employer's records alone may not be sufficient.

Business owners:

• Even after you move your domicile, your former state can tax business income sourced there. An office in Los Angeles or employees in Manhattan creates a nexus that persists regardless of where you personally live.

• You may need to restructure entities, close offices, or shift operations and clients to align with your new residence.

• A $10M business sale where operations remain in a high-tax state could trigger sourcing claims on a significant portion of the gain.

Remote work complications:

• New York's "convenience of the employer" rules may tax wages earned by remote workers if their employer is based in New York, even if the work is performed from a different state.

• Occasional flights back for meetings or client work in your former state can increase income sourcing to that jurisdiction.

• Residency audits often focus on whether remote work arrangements are genuine or merely paper changes.

Third Act Retirement Planning integrates residency planning with broader wealth strategy: coordinating the timing of equity events, charitable giving, Roth conversions, and business exits around the year you change state residency. We run side-by-side projections showing after-tax outcomes in candidate states so you can see-in real dollars-what the difference means over a decade of retirement.

Putting It All Together: A Faith-Informed, Long-Term Residency Plan

State tax planning should serve your calling, your family's needs, and your long-term purpose-it should never be the sole driver of where you live. But when domicile, statutory residency, and sourcing rules align with a move you'd genuinely want to make, the financial impact can be transformative. The difference between a well-executed residency change and a careless one is measured in hundreds of thousands of dollars and years of audit exposure.

A proactive residency plan fits naturally into a broader wealth strategy:

• Align your primary residence choice with retirement income planning, healthcare access, estate and legacy design, and multi-generational goals

• Check how states tax retirement income-Social Security, pensions, and IRA distributions are treated differently across jurisdictions, and this matters more as you age

• Recognize that as stewards, you are free to use every legal means to reduce taxes-including relocating to a lower-tax state-so you can better provide for family, give generously, and live out your calling with excellence

• Ensure your plan accounts for changing state law; what works today may shift as legislatures respond to outmigration trends

Third Act Retirement Planning supports clients through every phase of this process:

• Comprehensive tax projections comparing candidate states for your specific income, assets, and timeline

• Coordination with CPAs, attorneys, and other professionals to update legal documents and build an audit-ready residency file

• Guidance on charitable strategies timed to your move-maximizing deductions in the year of highest income

• Ongoing monitoring as state tax law evolves and your financial picture changes

If you're considering a move from a high-tax state in 2026 or 2027-especially after inheriting wealth, selling a business, or approaching a major equity vest-schedule a discovery call with our team. We'll help you determine whether state residency planning could meaningfully reduce your long-term tax liability and put more of your resources toward the people and purposes that matter most.