Income Tax Considerations When Retiring in Florida

February 13, 2009

Upon retirement many people consider spending more time at their Florida residences. In addition to warmer temperatures, the lack of a state income tax may be a lure for Badger fans. Prior to making the switch to Florida residency, you should review the long-term consequences of such a move.

In order to avoid Wisconsin’s state income tax, you will need to change your “domicile” to Florida. Your “domicile” is your principal residence for income tax purposes. Typically, to change domicile you will need to:

  • Own or lease a home in Florida and use it as your main residence;
  • Register to vote in Florida;
  • File federal income tax returns with a Florida address;
  • Obtain a Florida driver’s license;
  • Register and insure vehicles in Florida; and
  • Establish banking and social relationships in Florida.

As long as you meet the change of domicile test, you can retain your Wisconsin residence without incurring Wisconsin income tax.

However, before making the effort to establish domicile in Florida, you should examine your entire financial and lifestyle picture. For example, income earned from services rendered in Wisconsin (i.e. S corp. shareholder, LLC member, or partner in a Wisconsin entity) as well as income generated by property located in Wisconsin (i.e. rental property) will still be subject to Wisconsin income tax.

Additionally, if you retain your Wisconsin residence, you should keep in mind the federal income tax exclusion on the sale of a principal residence. As an ex-Wisconsin resident, if you want to sell your Wisconsin home, which you have not used as your principal residence you may end up paying federal income tax upon the sale of your Wisconsin residence. To avoid the income tax on the sale of the Wisconsin residence as a Florida-domiciled person, you must now become a Wisconsin-domiciled person for two years prior to selling your Wisconsin residence.

The federal exclusion provides that up to $250,000 ($500,000 for a married couple) of sales proceeds from a “primary residence” is excluded from taxation. To qualify for the full exclusion, the property must have been your primary residence for at least two of the last five years prior to the sale. When you own more than one home, the IRS has held that it will review six factors in determining whether the residence is a principal residence including the address listed on an owner’s federal and state tax filing, voter registration, auto registration, bills and correspondence, the location of principal banking relationships, and the location of principal social or religious organizations and clubs. The IRS test is similar to the states’ domicile test.

The change of domicile from Wisconsin to Florida can be a Catch-22 for income tax purposes. If you are considering changing your domicile to Florida, please give me a call to discuss.

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