1. A CHANGE IN DOMICILE FROM MAINE TO FLORIDA CAN HELP MINIMIZE TAXES
Retirees who have homes in both Maine and Florida may be able to reduce or
eliminate Maine income and estate taxes, and also reduce the real estate taxes on their
Florida home by changing their domicile to Florida.
The benefit of doing so has been enhanced by the elimination of the Florida
estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went
into effect on January 1, 2007.
It has been further enhanced by the Florida constitutional amendment that places
a cap of 3% on any annual increase in assessments applicable to a Florida homestead,
but not to a Florida home owned by a Maine Resident.
Retirees who have a substantial securities portfolio have benefited from the 15%
federal income tax on stock dividends and capital gains. In contrast, both the dividends
and capital gains are subject to Maine income taxes at a rate as high as 8.5%. Similarly,
Congress has increased the federal estate tax unified credit to $2 million, while Maine
continues to impose its estate tax on estates greater than $1 million at a rate of 9.9%.
This $99,000 tax can be deferred by married couples by proper estate planning, but
eventually has to be paid.
Maine’s failure of Maine to give comparable tax relief has motivated many
Mainers with homes in both Maine and Florida to consider a change of domicile to
eliminate Maine income and estate taxes in their entirety.
Checklist to Determine Residence
The Maine Revenue Service uses a checklist for determining residency, a copy of
which is attached.
Maine Law Definitions
For tax years beginning after 2006, a Maine resident is an individual who is
domiciled in Maine, unless the individual does not maintain a permanent place of
abode in the state, maintains a permanent place of abode elsewhere, and spends, in the
aggregate, not more than 30 days of the tax year in the state, or, within any period of
548 consecutive days, the individual
is present in a foreign country or countries for at least 450 days,
is not present in Maine for more than 90 days,
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2. does not maintain a permanent place of abode in Maine at which a minor child of
the individual or the individual's spouse is present for more than 90 days, unless
the individual and the individual's spouse are legally separated, and
during the nonresident portion of the tax year with which, or within which, such
period of 548 consecutive days begins and the nonresident portion of the tax year
with which, or within which, such period ends, is present in Maine for a number
of days that does not exceed an amount that bears the same ratio to 90 as the
number of days contained in such portion of the tax year bears to 548.
(36 Me. Rev. Stat. Sec. 5102 (5) (A))
Furthermore, a Maine resident is an individual who is not domiciled in Maine,
but maintains a permanent place of abode in Maine and spends, in the aggregate,
more than 183 days of the tax year in the state, unless he or she is in the U.S. armed
forces. (36 Me. Rev. Stat. Sec. 5102 (5) (B))
Note that, for these purposes, the geographic location of a quot;professional advisorquot;
retained by an individual may not be used to determine whether or not an individual is
domiciled in Maine. A professional advisor includes an individual who renders
medical, financial, legal, accounting, insurance, fiduciary, or investment services.
Charitable contributions may not be used to determine whether or not an individual is
domiciled in Maine. (36 Me. Rev. Stat. Sec. 5102(5))
Dual residency
If an individual taxpayer is regarded as a resident of both Maine and another
jurisdiction (i.e., is taxable both in Maine and in another state), then the Maine State Tax
Assessor must reduce the tax on that portion of the taxpayer's income that is subject to
tax in both jurisdictions solely by virtue of the taxpayer's dual residence, provided that
the other taxing jurisdiction allows a similar reduction. (36 Me. Rev. Stat. Sec. 5128) The
reduction in tax takes the form of a credit.
Nonresident defined
A nonresident is simply an individual who is not a resident. (36 Me. Rev. Stat.
Sec. 5102(3)) A nonresident alien is a recognized non residency status for Maine income
tax purposes.
Domicile defined
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3. Domicile is where an individual intends to make his or her permanent home, and
where he or she has the most legal ties. An individual can have only one domicile or
permanent home for state personal income tax purposes. Actual residence may or may
not necessarily mean domicile, for domicile is the fixed place of abode which, in the
intention of the taxpayer, is permanent rather than transitory. What constitutes domicile
is a question of fact rather than of law, frequently depending on a variety of
circumstances.
Not all retirees who own homes in Maine and Florida are eligible to elect Florida
as their domicile. Domicile is characterized in the Maine tax regulations as the place that
an individual intends to be his permanent home and the place to which he intends to
return whenever he may be absent. The regulations provide that, once established, a
domicile continues until the person moves to a new location with the bona fide
intention of making his fixed and permanent home there. A person’s declarations are
given due weight, but they will not be conclusive if they are contradicted by conduct.
For example, registering and voting in one place is important but not necessarily
conclusive. Likewise, the length of time customarily spent at each location is important
but not conclusive. A person can have only one domicile. If an individual has two or
more homes, the domicile is the one regarded and used as the permanent home. There
must be a present, definite, and honest purpose to give up the old place and take up the
new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection
must be followed by proper action. Motives are immaterial except as they indicate
intention.
A change of domicile may be made through caprice, whim, or fancy; for
business, health, or pleasure; to secure a change of climate or a change of laws; or for
any reason whatsoever, provided that there is an absolute and fixed intention to
abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile
of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or
informally, as he or she prefers, and even for the sole purpose of making evidence to
prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the
action genuine, and the evidence clear and convincing. The burden of proof rests upon
the party who alleges a change of domicile.
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4. Proof of Intent
Retirees who elect to make Florida their permanent residence should demonstrate
such intention in a clear and convincing way by taking as many of the following steps
as appropriate:
• File a declaration of domicile.
• File for a Florida homestead exemption.
• Obtain a Florida driver’s license and relinquish a Maine license.
• Acquire Florida license plates and relinquish Maine license plates.
• Register to vote in Florida and remove oneself from the Maine voting rolls.
• File a nonresident, rather than a resident, Maine income tax return if there is
Maine–source income.
• File a federal income tax return with the IRS Center in Atlanta.
• Transfer safe deposit box contents to Florida and close out a Maine box.
• Open a Florida bank account.
• Change credit cards to the Florida address.
• Execute a new Florida will, Florida durable power of attorney, and Florida health
care proxy.
• Refer to Florida residence in all trusts and other legal documents.
• Affiliate with Florida organizations and consider disaffiliation with Maine ones.
• Have family gatherings and social activities centered in Florida rather than
Maine.
• Affiliate with a church or temple in Florida.
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5. • If investing in real estate or businesses, focus on areas in Florida rather than
Maine.
• Transfer works of art, expensive furniture, heirlooms, and other valuable
personal items to Florida.
• Consider acquiring cemetery plots in Florida.
• List the Florida residence as the primary residence on all homeowners insurance.
• Turn in any Maine resident fishing or hunting licenses.
• License pets in Florida.
• If a retiree is a Maine notary public, resign and become a Florida notary public.
• Cancel any Maine real estate veteran’s or homestead exemption.
• Stay in Florida as long as practically possible each year.
• Consider acquiring a larger or more expensive home in Florida, or remodeling or
redecorating it, and acquiring a smaller or less expensive home in Maine, and
document any steps taken in doing so.
• If a physician has advised that either extremely cold weather or hot, humid
weather may be harmful to the retiree’s health, the physician should document
the medical issues accordingly.
A change of domicile from Maine to Florida will not save any Maine income taxes if
the retiree is present in Maine in a calendar year for more than 183 days. Taxpayers will
be considered “statutory residents” of Maine if they maintain a “permanent place of
abode” in Maine and are present in Maine for more than 183 days.
Keep a diary. A partial day is considered a full day. Therefore, if a retiree leaves
Maine at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be
considered absent from Maine for only one day. In addition to a diary, the burden of
proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain
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6. as much documentation as possible to support the entries in the diary. Failure to
account for a day will be presumed by auditors to be a day inside Maine. There are
some exceptions to the general rule, such as when a retiree is confined to a Maine
hospital or is present in Maine only to go to or from an airport.
Savings in Maine Income Taxes
Certain income derived from, or connected with, Maine sources will continue to
be taxable in Maine even if paid to the retiree after a change of domicile to Florida. For
example, Maine will tax items such as the distributable share of income from a former
law or accounting partnership and rental income from Maine real property. Maine will
not continue to tax income from annuities, dividends, and interest, even if from Maine
sources, unless the income is from property employed in a business, trade, profession,
or occupation carried on in Maine. In 1996, Congress passed legislation that prohibits
Maine from imposing its income tax on any retirement income of an individual who is
no longer a resident or domiciliary of Maine. To quantify the savings in Maine income
taxes, taxpayers may want to restate the most recent Maine resident income tax return
on a nonresident return and include only Maine–source income.
Savings in Maine Estate Taxes
The amount of Maine estate tax is based on the net taxable estate located in
Maine, meaning physically located or belonging to a Maine resident. The following
simplified examples illustrate the magnitude of the estate tax savings that will result
from a change of domicile to Florida:
If a former Mainer has changed his domicile to Florida and dies in 2007 with net
assets of $5 million (none of which are in Maine), his estate will pay federal estate taxes
of approximately $1,350,000 and no Maine estate taxes.
If that same individual had not changed his domicile to Florida and all his assets
were in Maine, his estate would pay Maine estate taxes of approximately $396,000. That
amount would be deducted on the federal estate tax return and the federal estate taxes
will be reduced from $1,350,000 to $1,171,800. Thus, the estate will pay a total of
$1,567,000 versus a total of $1,350,000, a difference of $217,800.
If that same individual has changed his domicile to Florida, but at the time of his
death owned a home in Maine valued at $1 million, his estate will pay a federal estate
tax of $1,314,360 and a Maine estate tax of $79,200 for a total of $1,393,560. Thus, the
estate pays additional net estate taxes of $43,560 because the home is located in Maine.
Note the computation of the Maine tax starts out with a calculation of a Maine tax on all
assets wherever located and then applies the applicable percentage (one-fifth of
$1,067,600).
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7. A retiree dies in Maine with an estate of $1,500,000. His estate will pay a Maine
estate tax of $49,500. There will be no federal estate taxes because of the $2 million
threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his
domicile to Florida and had no assets in Maine, there would be neither a federal estate
tax nor a Florida estate tax. If the $1,500,000 included a Maine home valued at $500,000,
however, then there would be a Maine estate tax of $16,499 (one-third of $49,500).
As indicated in the above examples, even if there is a change of domicile, Maine
will nevertheless impose a Maine estate tax on real property and tangible personal
property having any actual legal situs in Maine. If retirees decide to change their
domicile to Florida, it may be desirable to transfer the Maine home to a limited liability
company or other similar entity. Because shares of the limited liability company
constitute intangible property, they should not be subject to Maine estate taxes even
though the entity owns real property in Maine.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both
spouses change their domicile at the same time. The primary residence of one is the
primary residence of the other. But consider the situation where they have a home in
Maine and a home in Florida and the wife stays in Florida from mid-October until mid-
May and is not in Maine for more than 183 days during a calendar year. On the other
hand, the husband returns to their Maine home one week a month for business reasons
while his wife stays in Florida. As a result, he is in Maine for more than 183 days in each
calendar year, although his wife is not. The husband and wife file a joint federal income
tax return. The husband files a resident Maine tax return. The wife has no Maine–source
income and files no Maine tax return. The wife has substantial income from her stocks
and bonds. The Florida home is titled in the wife’s name. She files a declaration of
Florida domicile, registers to vote in Florida, receives a homestead exemption on her
Florida home, and follows many of the items on the checklist. As a result, there is a 3%
cap on any increase in its assessment. A Maine auditor claims she must pay Maine
income taxes on the dividends and interest she receives because she has not effectively
changed her domicile. The auditor points out that her husband retained a significant tie
to a Maine business and, therefore, she cannot change her domicile to Florida.
Caveat
A change of domicile makes the laws of Florida, rather than Maine, applicable,
including marital rights. Although a Mainer may have the requisite intent to make a
domicile change, if challenged, such intent must be demonstrated by clear and
convincing evidence, which requires a high degree of proof. The lack of such evidence
may result in not only an assessment, but also substantial interest and penalties. Where
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8. the result is uncertain, a change of domicile should not be attempted unless the taxes
that will be saved are substantial. No change should be made without professional legal
guidance.
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