Claiming Residence in Another State to Flee Minnesota's Taxes?

If you’re trying to avoid Minnesota’s estate, gift and income taxes by claiming another state as your state of residence, Minnesota’s tax collector – the Minnesota Department of Revenue – will be watching.

Minnesota claims you as a Minnesota resident for tax purposes if you own, rent or occupy a dwelling within Minnesota and spend 183 days or more in Minnesota during the year, or if you are deemed  by the Department of Revenue to be “domiciled” in Minnesota.

The Minnesota Legislature increased the top individual income tax rate from 7.85% to 9.85% in 2013, impacting married filers earning more than $250,000 per year and single filers earning more than $150,000 per year. Minnesota also has an estate tax, which roughly ranges from 6% to 16% of the deceased’s taxable estate, but there is a $1 million exemption. And, Minnesota enacted a new 10% gift tax in 2013, which also has a $1 million exemption.

Two states boasting warmer weather and no state income, gift, or estate taxes are Florida and Texas.

A 2013 CNBC survey ranked Minnesota 3rd among all states in quality of life while Texas ranked 41st and Florida 28th. A 2009 Forbes survey ranked Minnesota third in the quality of health care while ranking Texas and Florida among the bottom 8 states.

Nonetheless, if taxes and/or warm weather are your primary concerns, the best way to show Minnesota’s tax collectors that you are no longer a Minnesotan is to sell your Minnesota real estate and take all of your personal possessions with you.

You bear the burden of proof to show that you weren’t in Minnesota more than 183 days in a given year, and that you aren’t domiciled in Minnesota.

Any day in which you spend even one minute in Minnesota is counted as a Minnesota day toward the 183-day rule unless you are just crossing Minnesota as you go from Point A outside Minnesota to Point B outside Minnesota. You can stop in Minnesota briefly, but don’t stay more than 24 hours as you cross the state, or your time will be counted as a Minnesota day.

Minnesota’s Department of Revenue will examine your phone bills, credit cards, airline tickets and other documents to see if you really were outside of Minnesota.

Even if you pass the 183-day test, you could flunk the domicile test, and be deemed a Minnesota resident.

As for your domicile, you can only be domiciled in one state, and you are presumed to remain a Minnesota resident until you sincerely establish another domicile. Your “intention” to be domiciled in Minnesota or another state is a key part of the analysis.

The Minnesota Department of Revenue uses a 26-factor test to determine whether you are domiciled in Minnesota even though you claim not to be.  The test looks at such things as where you own real estate, where you keep your bank accounts, where your doctors, accountant and lawyer are located, where your vehicles are registered, and where you spend your time.

To successfully claim domicile in another state, you should have opened up new checking, savings and brokerage accounts in that state even if your current financial institutions have a national presence. Why? Your existing accounts will still be tied to Minnesota in the institutions’ records. You need to break that tie.

Don’t leave a car behind for your use when you are in Minnesota, and register all of your vehicles in your new state. File your federal tax return from your new state. Obtain a driver’s license from your new state, and vote there. Use only your new address on all mailings. Find a new lawyer, accountant and broker in your new state. Ask your new lawyer to draft a new estate plan for you based on the laws in your new state.

Also, don’t spend more time in Minnesota than in any other state, even if you slip under the 183 days.

Note that even if you successfully show that you are not a Minnesota resident, you will still pay income taxes on any earnings from businesses or real estate that you own in Minnesota.

©2014 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305                  952-649-9771 bonnie@bwittenburglaw.com    www.bwittenburglaw.com