LAW OFFICE OF ROBERT H. EARDLEY, P.A.
Wills, Trusts, Probate, Prenuptial Agreements,
Elder Law & Florida Tax Residency Planning
FLORIDA TAX RESIDENCY PLANNING
Naples, Florida Tax Residency Planning Lawyer
Florida is well-known throughout the United States and the world as a popular tourist and retirement destination. Florida boasts a very mild climate, with only a slight difference between winter and summer temperatures, and coastlines with miles of beautiful beaches, keys and islands, all with year-round water sports. Additionally, Florida has a number of popular tourist attractions, including Disney World and Busch Gardens, and is very taxpayer friendly compared to most other states. For these reasons Florida is becoming increasingly popular as a home for people that used to live in other states or countries. However, perhaps the greatest factor attracting newcomers to Florida is the significant tax benefits for its residents. In fact, an average of nearly 400,000 people per year relocate to Florida and a handful of other states that have limited or no income or death taxation.
Obtaining the various tax and other benefits by reason of Florida residency is fairly straight-forward for a person whose only home is in Florida. However, the matter becomes complicated and calls for careful attention for a person who maintains a home in Florida and a summer residence elsewhere.
FLORIDA’S TAX BENEFITS
NO STATE INCOME TAX
First, and perhaps foremost, Florida is one of only a handful of states in the United States that impose no personal income tax.
Florida’s no income tax policy is a long-standing part of state taxation philosophy – being first drafted into the State Constitution in 1885. Importantly, to remove Florida’s Constitutional ban on a state income tax would require that a Constitutional amendment be enacted – a most unlikely event.
As noted, most states impose a state income tax, and this tax rate commonly is in the 6% to 8% range – or even higher. Therefore, by establishing a Florida residency one obtains an “automatic pay raise” merely by avoiding the state income tax from his or her state of origin.
Interestingly, Florida raises the majority of its revenue from the sales tax.
NO MUNICIPAL INCOME TAX
The Florida Constitution generally bans municipalities from levying a personal income tax. However, many non-Florida cities do levy personal income taxes. For example, New York City residents are subject to a marginal city income tax rate of almost 4% in addition to state income tax.
LIMITED PROPERTY TAXES
Florida also has a long-standing public policy of providing homestead property tax relief stemming from the Great Depression era. For example, in 1934 the Florida Constitution was amended to provide a $5,000 exemption on the assessed value of one’s homestead. This exemption, though not keeping pace with the cost of housing, now stands at $50,000.
However, the much more important property tax benefit given to Florida residents is the “Save Our Homes” homestead exemption provided in Article VII of the Florida Constitution. Under this exemption the assessed value of a Florida homestead for property tax purposes may only be increased in any year by the lesser of (i) 3% from the homestead’s prior year tax assessment, or (ii) the percentage change in the consumer price index – notwithstanding the actual increase in the market value of the home.
This is not the case with a non-resident’s property. The Florida home or vacation property of a non-resident may be adjusted annually by up to 10% of its prior year assessment. The result of this resident/non-resident disparity is that the Florida non-resident, over time, often pays thousands of dollars more in property taxes than the next door “Florida” neighbor with a comparable home.
NO STATE DEATH TAX
Another significant tax benefit afforded to Florida residents is that it imposes no death tax (also sometimes referred to as an “estate” or “inheritance” tax depending on the state). Years ago, Florida enacted what is commonly referred to as a “pick-up tax” which dovetailed with federal estate tax law. The pick-up tax did not increase overall death taxes but merely redirected a portion of the federal estate tax collection to Florida coffers. However, several years ago Congress removed the state pick-up tax credit from the federal estate tax regime, and therefore Florida’s pick-up tax essentially was revoked due to the federal change. Importantly, as of this writing, there appears to be no significant effort to implement a new Florida death tax system to replace the lost pick-up tax revenue.
NO INTANGIBLE PERSONAL PROPERTY TAX
Many states impose a tax on the “intangible” assets of its residents – typically assets such as brokerage accounts. Although Florida is known as a tax haven, for a number of years it did impose an annual intangible personal property tax (once at a rate of $2,000 in tax for every $1 million in value). Although this tax was modest in comparison to the income taxes of many other states, for years the intangibles tax was a hindrance to those considering Florida residency.
Fortunately for taxpayers, the intangibles tax was repealed more than a decade ago – and thus one of the last vestiges of a Florida individual tax has taken the same course as Florida’s income and death taxes.
ESTABLISHING A FLORIDA TAX RESIDENCY
A number of steps are useful for establishing a Florida tax residency, such as obtaining a Florida driver’s license and registering to vote. However, for one who also owns a non-Florida residence, it is critical to establish Florida as the “primary” home to obtain Florida’s tax benefits. For the seasonal resident, becoming a Florida tax resident is essentially a matter of qualifying as a non-resident of the northern state under that state’s law. Importantly, many northern states apply “day-counting” tests to determine residency but also have complicated “intent” tests even if the day-counting test is avoided.
FLAWED TAX RESIDENCY CONSEQUENCES
As a result of state budget situations, many northern states are escalating their efforts to tax Florida persons as residents. For example, Massachusetts has a “Residency Tax Unit” for the purpose of auditing persons who claim Florida residency but also own a Massachusetts residence.
If one fails to establish a Florida residency, the northern state will have jurisdiction to tax the person’s entire income or estate, including retroactively.
Establishing a Florida tax residency is the right decision for most. However, it should be carefully implemented with legal counsel to ensure that one’s tax benefits are secure. Please let us know if we may be of assistance to you in establishing a secure Florida tax residency.
ROBERT H. EARDLEY