LIVING IN MINNESOTA PART-TIME FOR THE TAX BENEFITS?
Changes in the Law Impact Residency Determination
Minnesota has remained dependent on the income tax to fund its operations. This has caused a focus on income taxes as the means of supporting our government programs. The result has been upward pressure on our income tax rates. As residents of Minnesota, we face some of the highest state income tax rates in the nation. With changes instituted in 2013, our rates range from 5.35% to 9.85%.
The Center of the American Experiment reported that Minnesota lost nearly $1 billion of income to other states in the year after the income tax increases of 2013. It is said to be the largest net loss of income ever reported for Minnesota. This is not the net effect of retirement. Rather, people in their prime working years represented the largest portion of the net loss of taxpayers and income. Looking specifically at top earners, Minnesota is losing taxpayers earning over $200,000 at the fourth fastest rate among states. And in the middle class, taxpayers earning between $100,00 and $200,000 accounted for roughly 41% of the state’s net population loss.
Minnesota Reacts to Loss of Income Tax to Other States
In response to this flight of residents, Minnesota has instituted an audit policy to challenge whether taxpayers have sufficiently cut ties to Minnesota for the purpose of income tax liability. The Department of Revenue has promulgated administrative rules in addition to the statutory definitions in an effort to provide instruction to auditors and taxpayers.
Legislative Developments Ease Some Domicile Indicators
While Minnesota has been aggressively auditing residents who attempt to establish their residency in a more tax forgiving state, it has become easier to maintain your Minnesota connections to professionals and charities. The legislature modified what the Department of Commerce can consider in the process of determining where an individual is domiciled for tax purposes. The state can no longer consider (1) charitable contributions made within or without the state, (2) location of the individual’s attorney, certified public accountant or financial adviser or (3) the location of a financial institution at which the individual applies for credit, or opens or maintains an account. Residents leaving the state can now maintain their financial and legal advisers in Minnesota without fear of it being a factor in determining their residency.
Still a Complicated Path to Residency Determination
Even with these changes, the state continues to look to a non-exhaustive list of factors to determine whether an individual is a resident for Minnesota income tax purposes. In making a determination as to whether an individual is a Minnesota resident or not, it will be helpful for you to know what the state will look for:
A. Location of domicile for prior years;
B. Where the person votes or is registered to vote;
C. Status as a student;
D. Classification of employment as temporary or permanent;
E. Location of employment;
F. Location of newly acquired living quarters whether owned or rented;
G. Present status of the former living quarters, i.e., whether it was sold, offered for sale, rented, or available for rent to another;
H. Whether homestead status has been requested and/or obtained for property tax purposes on newly purchased living quarters and whether the homestead status of the former living quarters has not been renewed;
I. Ownership of other real property;
J. Jurisdiction in which a valid driver’s license was issued;
K. Jurisdiction from which any professional licenses were issued;
L. Location of the person’s union membership;
M. Jurisdiction from which any motor vehicle license was issued and the actual physical location of the vehicles;
N. Whether resident or nonresident fishing or hunting licenses have been purchased;
O. Whether an income tax return has been filed as a resident or nonresident;
P. Whether the person has fulfilled the tax obligations required of a resident;
Q. Location of the place of worship at which the person is a member;
R. Location of business relationships and the place where business is transacted;
S. Location of social, fraternal, or athletic organizations or clubs or lodges in which the person is a member;
T. Address where mail is received;
U. Percentage of time (not counting hours of employment) that the person is physically present in Minnesota and the percentage of time (not counting hours of employment) that the person is physically present in each jurisdiction other than Minnesota;
V. Location of jurisdiction from which unemployment compensation benefits are received;
W. Location of schools at which the person or the person’s spouse or children attend, and whether resident or nonresident tuition was charged; and
X. Statements made to an insurance company, concerning the person’s residence, and on which the insurance is based.
“To Do List” to Establish a Physical Presence
There are specific steps that an individual should take to establish a physical presence – in the eyes of the Minnesota tax code – in his new home state. You may find the following list helpful:
- Most importantly, spend as much time as possible in your new state and as little time as possible in Minnesota. Generally speaking, any individual who is physically present in Minnesota for more than 183 days out of the year is, by default, a Minnesota resident. Keep very good documentation of all of the days you are in your new home state, what days you are traveling (both for work and personal time) and what days you spend in Minnesota. You should have a journal/travel log to keep track of where you are and organize receipts and documents that you receive while you are in your new home state to prove you were in fact present there on the days you report. Be prepared to furnish records of canceled checks, credit card receipts, airline tickets, utility bills, telephone bills, credit card statements and other evidence that documents your relationship with your new home state. Remember, any part of the day in Minnesota, no matter how short (even a minute), is considered a full day spent in Minnesota for tax purposes; this includes travel time to Minnesota. Consider trying to make trips to Minnesota seasonal and as limited as possible. Don’t push the 183 day threshold if you don’t absolutely have to.
- Distance yourself from your Minnesota home and cabin as much as possible. If possible, list or sell your home in Minnesota. Consider buying real estate in your new home state.
- Limit your business involvement in Minnesota. Make investments in real estate or businesses in your new home state. Do your best to sever active participation in businesses in Minnesota, as well as any substantial investment and/or management of closely held businesses in Minnesota.
- Transfer family possessions, heirlooms, works of art, furniture, antiques, clothing, collections and “important’ or “sentimental” pieces of personal property to your residence in your new home state (assumption is that you would keep those important items at your permanent home). Sentimental items (such as family picture albums) and other personal belongings of significant value (art, antiques, etc.) should be moved by a first rate carrier and you should maintain insurance records, shipping bills and any other documentation connected with the transport of items. Transfer valuables (stocks, bonds, jewelry, etc.) from safety deposit boxes in Minnesota to a safety deposit box in your new home state. Close any Minnesota safety deposit box.
- Arrange for family gatherings in your new home state.
- File a Declaration of Domicile with the Clerk of Court in the County where your new residence is. You should also change your Minnesota home’s tax classification to non-homestead. Obtain a driver’s license in your new home state and vehicle registration for as many of your vehicles as possible (including boats, ATVs, etc.). Surrender old registration to Minnesota.
- Register to vote and vote in your new home state. Under no circumstances should you vote in Minnesota.
- Establish wills, trusts, health care directives and powers of attorney that recite your new home state domicile.
- Change affiliations with religious and social organizations to your new home state and request “non-resident” status with any Minnesota organizations that you plan to maintain a relationship with. Same goes for any professional memberships or licenses. If possible, become active in the community or local political organizations in your new home state.
- File federal income tax returns referencing your new home state address. Affirmatively state on your last return with the state of Minnesota that it was your final Minnesota state tax return.
- Change addresses for credit cards and other bills to your address in your new home state.
- Remove your name from bills in Minnesota (utility bills, cell phone bills, etc.).
- Establish relationships with doctors, dentists, and insurance agents in your new home state.
- Notify old insurance companies that insured items have been moved to in your new home state. Have your medical records transferred to your new home state.
- Direct parties to remit any payments due to you to your new address.
- If you have hobbies, pets or something fun that you do in your personal time, move these items and establish these activities in your new home state. For example, if you like carpentry as a hobby, your workshop should be in your new home state (the idea here is that the things you like to do should be connected to you at your home). If you have a pet, microchip it in your new home state.
- Buy a cemetery lot or crypt in your new home state.Change the listed address on your passport to your new home state
- .Indicate on any written communications or oral comments, even if informal, that you consider in your new home state to be your permanent home.
- Subscribe to local newspapers in your new home state and cancel subscriptions in the old state or re-direct for delivery to your new address.
Commit to the New Home State
Establishing a physical presence in a new state will not be difficult. The problem will be whether you have taken sufficient steps to divorce yourself from Minnesota. A change in domicile requires a serious commitment and a change in lifestyle. There is no minimum checklist of requirements that can be fulfilled to ensure that the “change” has been effective and that the state will not audit your residency. Rather, you must sufficiently cut ties to Minnesota and have a genuine commitment to move to your new state.
Connect With Your Advisors
Sanford, Pierson, Thone & Strean, in conjunction with your financial adviser, can help you achieve your ultimate goals by assisting in the planning and execution of your move. We have a breadth of experience in business and corporate law, estate planning and probate and real estate (in addition to creditor remedies and litigation). We can help guide you through your change in residency to maximize the impact of your assets and minimize your burden.