What better time to talk about Minnesota residency requirements than March, often the snowiest month of the year? But the snow isn’t the only thing that has lifelong Minnesota residents packing their bags and relocating to other states. Per a report published by the Tax Foundation in February 2016, only two other states (California and Oregon) had a higher top income tax rate than Minnesota (9.85%) for 2016. Coupled with an estate tax exemption far below that of the Federal level, many Minnesotans are cutting ties with the state to avoid paying a significant amount of taxes during retirement and upon death, a move that’s very much on the state’s radar.
Minnesota’s Department of Revenue offers an informative, residency-focused webpage geared towards clarifying the gray areas of residency status, taxable income and residency audits. Aligned with residency is domicile, and that is where most people run into issues, especially if real property is retained in Minnesota. The state has identified 26 different factors that may help determine an individual’s domicile for tax preparation purposes and in the event of an audit. Some notable factors are:
- Where you spend a majority of your time
- Where your family attends school or church
- Location and status of professional licenses or union memberships
- Status of former living quarters
- Driver’s license and voting registration changed
- Legal address updated on insurance and financial documents
It’s not intended to be an impossible or exceedingly tedious process, but Minnesota does stand to lose substantial tax revenue if residency is not monitored appropriately. Individuals who are considering a residency change should proactively work with their CPA, lawyer and financial advisor to ensure that nothing is missed or overlooked. Proper documentation and timely actions are critical in the event of an audit.
At the end of the day, we never like to see the tax tail wag the dog in a relocation decision when so many other factors are more important. We are happy to model out possible income and estate tax scenarios under a variety of residency options and talk through the non-financial aspects of the process as well. Please view our services and contact us today to begin the discussion!
Laura Bereiter, CPA, PFS™, CFP® joined White Oaks Wealth Advisors in October 2015. She offers comprehensive wealth, tax, and estate planning to the firm’s clients.