One of the things we did before we headed to Panama was to change our state of domicile.
If you’re not familiar with the term, your state of domicile refers to your principal place of residence. If you leave for a while, it’s what can be thought of as the place you would return to afterward.
In other words, it might be considered your “home base” in the U.S. – your permanent place of residence.
For snowbirds that head from Ohio to places like Florida during the winter, their home in Ohio would more than likely be their state of domicile. It’s also the state you’ll be taxed in for any income earned (though other states you reside it might assess something as well).
When you have a situation like the Ohio-Florida snowbird example, life is pretty straightforward.
However, when you sell off everything you own and move to another country, you might have a little more flexibility. To a degree and with some careful planning, you can almost choose any state of domicile you want.
My friend Joe at Retire by 40 is in a similar position and might consider moving to Thailand down the line. He was interested in the moves we made in regards to our state of domicile and asked if I’d consider writing a post on the subject… so here we are!
Changing your state of domicile is not something you just want to do on a whim in the hopes of paying less in state income taxes. You need to be sure all your i’s are dotted and your t’s crossed before making a change. Otherwise, your current state could come after you to get what they feel is owed to them.
So before we go any further, let me remind you that I’m not a lawyer (thank, goodness!). I’m also not a CPA, CFP, or anything along those lines. In fact, I don’t have any cool acronyms following my name (except maybe some lingering IT certification titles). In other words, I’m just a guy talking – talk to a professional before doing anything you might regret later!
So why change your state of domicile?
There are definitely some benefits to changing your state of domicile. Depending on the state, you may be able to gain:
- Lower (or no) state income taxes
- No estate tax to survivors upon your death
- Better probate or divorce laws
For most of us who are planning to retire to another country to spend most of their time, having no state taxes is going to be the key benefit most of us would be after.
The “why” for this should be pretty clear. Most folks have a good portion of their retirement savings in tax-deferred accounts such as a traditional IRA, 401(k), 457, or 403(b) plan. Some states also tax your social security income.
That means when you start drawing on any of these, you’re likely going to have to ante up to the taxman. That “income” is also going to be something you could take a good hit on with state taxes as well.
In our case, we’re planning to do Roth IRA conversions every year to move money from our 401(k) plans. Although there’s no penalty for doing that (if done correctly!), it’s still a taxable event. And since our goal is to move the money over in larger chunks during these times of low tax rates, not paying state taxes on the conversions can be valuable.
According to Investopedia,
As of 2019, seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—levy no personal income tax. Two others, New Hampshire and Tennessee don’t tax wages. They do currently tax investment income and interest, but both are set to eliminate those taxes soon. That will bring the number of states with no income tax to nine by 2025.
So right off the bat, you might think “great, I can pick any one of these states and be good to go!” But, unless you’re just up-and-leaving, you need to be careful.
For instance, in Texas (which is the state we moved to before heading to Panama), the property taxes are much higher. If we were just selling our home in Ohio and moving to Texas where we’d buy a home, we’d be in for a surprise.
World Population Review lists Texas as the third-highest property tax state in the country in 2019. So sure, we’d save on state income taxes, but we’d be hit with some much higher taxes on our home that would negate and probably crush the benefit.
However, if you’re renting or living with someone else, that becomes a moot issue. And that was our situation as we moved into my brother and sister-in-law’s house in Texas. They’re thrilled to be footing the property tax bill themselves!
The point is that finding the right state to be your state of domicile is going to be different for anyone looking to do this. It depends on your current situation, exactly what your plans are, and your resources available (like living with family!).
When you’re planning to move out of the country for most of your time, it makes it much simpler to change your state of residence and domicile. We weren’t going to have an actual place of our own in the U.S. and we weren’t planning to come back to Ohio much (except for an occasional visit to friends and family).
Although there are multiple options on which state to choose, it was a no-brainer for us to make Texas our state of domicile. No state income tax and my brother and sister-in-law were willing to let us live with them there each time we returned from Panama.
Just to reiterate though, it’s critical that whichever state you choose actually becomes your state of domicile. It needs to be a place where you intend to come back to when you return. Otherwise, the state you were formerly a resident of can come after you… and nobody wants that kind of fun!
It’s important to know what constitutes residency in the state you’re leaving from and what are their rules on leaving. Ohio isn’t generally as aggressive as some states might be (hello, California!). In fact, the rules on what constitutes you being a resident of Ohio are fairly simple, which is a plus for us.
So that’s the easy part. But making it actually happen involves some good planning beforehand. It means cutting ties as much as possible with your old state and making your new state your new home.
Changing our state of domicile
There are multiple ways to become a legal resident of Texas, but the most straightforward is to just get a Texas driver’s license. So that’s what we decided to do.
However, when you’re not owning or renting a home there, it makes life a little more complicated. The Texas DPS (Department of Public Safety) wants to make sure you’re actually living in Texas. And as such, they want proof, which makes perfect sense.
Considering we were selling our car and didn’t have a place in our name, life becomes slightly more complicated.
An easy way to do this would have been to ask my brother to move some utilities over to our names temporarily. However, our goal was to make this move with as little disruption to the lives of my brother and sister-in-law as possible.
I’m an overachiever, but here’s what we did to more than satisfy all requirements:
1) Financial institution – I changed our address for one of our financial institutions over to their address. Why not change them all? Because I didn’t want a lot of mail going to their house (small footprint, remember?). I’ll come back to that shortly.
I chose our Schwab joint checking account because that one showed both our names on the statements so we could both use that same document.
2) Medical card – I changed the address for our health insurance (which was Liberty HealthShare at the time) to be their Texas address.
3) Car insurance – We still had Lisa’s car because we drove it down to Texas with everything we owned as we rounded out our July adventure. Because of that, we had an auto policy in place.
Long story short though, I actually changed insurers because our agent in Ohio was making it difficult for us to change our address. So I went directly to a different insurer, put a new policy on it, and canceled the old one. The new policy had my brother and sister-in-law’s address and once we sold Lisa’s car, I canceled it.
4) Renter’s insurance – We have a basic renters policy in place for us at their house in Texas. This is not a requirement, but I did that because I needed something in place to make our umbrella policy work for our businesses once we sold our house and cars. That’s a story for a different day, but it still gave me some additional proof if needed.
As a side note, there are so many different options that we could have used such as getting a Texas bank account, putting various bills in our name, etc. For our situation though, these options were the simplest to do.
I made all these changes a couple of months before we headed down to Texas because I needed to ensure I would have statements with the correct info on them. I wanted that cycle of time to be in place first.
We printed everything off and brought them to the Texas DPS and went through the procedure:
- Turned in our applications we had filled out prior
- Provided all the required documents
- Paid the application fee ($25 for each of us)
- Provided our thumbprints
- Took and passed the vision exam
- Surrendered our old unexpired Ohio licenses
And -POOF- we’re now residents of Texas!
After that, we cut all paper ties with Ohio. We no longer have anything pointing to us in Ohio as Texas is now our residence.
The one “iffy” exception are my three businesses. These are all LLCs that are in Ohio – my rental property LLC, my publishing company, and the Route to Retire “monster” enterprise!
This concerned me probably way more than it should have. My awesome financial advisor/accountant, David from Remote Financial Planner, recommended that I move these to Texas – not necessarily as a must, but more just to clean the slate and get rid of any loose ends.
I started down that path and it was going to be a major pain in the @#$. After talking to multiple attorneys (yes, three different attorneys!), I decided not to make any changes. Although the tax burden of any income they make will still flow through to me, legally that should not cause any problems with my change of domicile.
Down the line, I might reconsider – we’ll see if it’s worth the trouble.
Our mailing address
When changing your state of domicile, you’re generally changing your state of residence. Because of that, all mail should change. In fact, to show you’re done with your old state, you need to change over your address with everything possible.
As I mentioned, I moved a couple of things to my brother and sister-in-law’s address temporarily. The reason this was temporary is that my goal was to keep them from getting inundated with our mail while we were in Panama.
To accomplish this, I signed up for a virtual mailbox. The idea is that you get assigned a legal address through one of these companies and send all your mail there. They then scan your email and then you decide what you want to do with it – things like:
- Download a PDF of the scanned mail to your computer
- Have them pitch it
- Have them shred it
- Have them forward it to a different address
- Forward checks to a bank to be deposited
There are so many different companies for this and some offer all these options (or more), some charge fees differently, and some are better than others.
I’ve talked about this before, but we decided on Anytime Mailbox. The biggest reason I liked them is that some of their locations allow you to go and pick up your mail as well if you want. I signed up for an address in Austin, which is close to my brother’s house.
That means when we’re back in town, I can swing by and pick up any mail that I didn’t have a better choice on. A good example I’ve run into so far is when I get a new or replacement credit card. Not much I can do with that online so I just pick it up when I come back.
Legal address versus the mailing address
Knowing the difference between these two terms is important. Your legal address can sometimes be referred to as your home address – it’s where you live. Your mailing address, however, can be anywhere else you want your mail to be delivered.
When I changed addresses for anything I had an account for, I generally made my mailing address the new address to use.
However, when the option was presented to allow for both a legal/home address AND a mailing address, that was even better. I was able to use my brother’s address for the legal/home address and my virtual mailbox address for the mailing address.
This is a common option for financial institutions and many will require your legal/home address (I believe this is a legal requirement). Allowing this option satisfies both the legal requirement and me wanting any mail to go to the virtual mailbox.
After everything was said and done, all of our mail now goes to Anytime Mailbox except for things related to the state of Texas (my driver’s license, voter registration, etc.). That goes to my legal address and mailings should be very rare.
Live in your new state of domicile
The concern with changing your state of domicile in a case where you don’t have a place in your name is that your former state has a little more ground if they decide to come after you. Again, this depends on how aggressive the state would be, but of course, they all want their share of the pie.
In our case, I need to ensure that if that does happen, I can show the state of Ohio that my intent is for Texas to actually be my state of domicile. And with us living in Panama for longer periods, that becomes a little more complex.
So, the key is to be able to show that when we’re back, Texas is our home. A few other things we’ve already done:
- Registered to vote in Texas (we did that when we got our licenses)
- Applied for a card at the local library (we also get books when we’re in town)
- Spend time there (we do live there when we come back from Panama)
And, of course, we’ll file taxes as Texas residents at tax time. Plus, we’ll be sure that we don’t try to cut corners and say that we were residents of Texas for the whole year – we’ll be partial residents of both states for 2019. Why? Because making January 1 your date as a new full-time resident of your new state is a red flag for an auditor and I don’t like red flags.
Some folks could show further intent just by being there more often. You could have real estate in your name, have your car registered there, sign up for a gym membership, join a local parish, etc.
It’s important to sever ties where possible with your old state as well. Cancel any memberships you have there with libraries, clubs, or other organizations.
With us having just two suitcases to our name and spending so much time in Panama, our choices are more limited than it would be for many others. But we’re careful to do what we can to be able to demonstrate why this is our state of domicile if it’s ever necessary.
Have you ever considered how changing your state of domicile can be a good strategy to use in retirement?
Thanks for reading!!