My wife and I are in our mid-50s and she just took a buyout from her company. I am planning to work for another 10 years and then I will retire. The company I work for told me that they are not going to reopen their Michigan office, and that moving forward I will be working at home. My wife and I own a condominium in Florida, and since our two children no longer live in state, my wife thought it would be smart to make Florida our residence. She figures that we can save a substantial amount on Michigan income taxes. What do you think? You should know that because both our parents still live in Michigan, we plan on keeping our Michigan home for as long as they are around.
Jerry and Marge
Dear Jerry and Marge:
There is no doubt that spending time in Florida, particularly in the winter, has its benefits. The two that come to mind are the beaches and the temperature. That being said, in order to make Florida your primary residence, one of the major requirements is that you spend at least 183 days per year there. If you don’t spend at least 183 days in Florida, you would not be allowed to change your primary residence for tax purposes. Although the residency requirement is the major hurdle to overcome, there are also some minor ones, such as filing a declaration for domicile in the Florida county you intend to become a resident, and to file a final Michigan state income tax return. However, the main requirement is you spend at least 183 days in Florida.
As you know, Florida does not have a state income tax; therefore, from an income tax perspective, the move to Florida will save you what you would have spent on Michigan taxes. However, there is another tax that you must be concerned with and that is property taxes.
Under Michigan law, if Michigan is your primary residence, you are entitled to a homestead exemption on your primary residence. The result of this is a substantial reduction in your real estate taxes. However, once you make Florida your primary residence, you no longer will be able to qualify for the Michigan homestead exemption. Therefore, your property taxes in Michigan will increase substantially. It is not unusual that when you remove your homestead exemption, your property taxes increase by about 40 percent. Of course, you would then qualify for an exemption in Florida; however, it doesn’t appear that Florida’s homestead exemption is as generous as Michigan’s. Therefore, the reduction in your Florida property taxes may not be as much as the increase in your Michigan taxes.
My recommendation is that you first calculate the potential increase to your Michigan real estate taxes by losing the homestead exemption and then determine the potential reduction in your Florida property taxes by becoming a Florida resident. If the amount you are paying in State of Michigan income taxes plus what you are saving in Florida property taxes is greater than what your increase in your Michigan property tax bill will be, then claiming Florida as your residence would seem to make sense. On the other hand, if there is no savings then there is no reason to make the change.
Obviously, the State of Michigan is not happy to lose tax-paying citizens to Florida. Therefore, the state sometimes contests and challenges the move. In order to cement that Florida is your primary residence, in addition to spending at least 183 days in Florida, it is important to complete a declaration of domicile form. Every county in Florida has their own form, and filing this will help change your residence. In addition, it’s a good idea to obtain a Florida driver’s license and to re-register your cars in Florida. It is also smart to not only register to vote in Florida, but to actually vote in the first available election. The bottom line – the more you can cut ties with Michigan and establish those new relationships in Florida, the better things will be for you.
One last note, if you do make the changes and become a Florida resident, it is important that you have your estate plan re-looked at, particularly, your medical and durable powers of attorney.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at email@example.com.