A new Floridian breathes a sigh of relief when he or she escapes the clutches of the northern state income tax collector. Many northern states impose significant income taxes. Illinois individual income tax rate is 4.95%; Wisconsin is 4.25%, and in New York the tax man demands 8.82%. What makes Florida’s income tax break even more attractive is Florida’s income tax prohibition is protected by the Florida Constitution. To begin collecting an income tax, Florida voters would have to approve amendment of the Constitution, which would likely be difficult.
Moving to Florida does not avoid federal income tax, but it can save a bundle in state taxes. That benefit even extends to pensions from another state. The Federal Pension Source Tax Act of 1996 prohibits the state where a pension was earned from taxing the recipient if the recipient is no longer a resident of that state.Many are attracted to Florida because it does not collect an estate or inheritance tax. An estate or inheritance tax is paid on assets of a person when he or she dies for the privilege of allowing them to pass assets to family members or others. It is still collected at the federal level on estates of over 5.49 million dollars. Eighteen states plus the District of Columbia also charge an estate or inheritance tax, or both. Depending upon the amount of the estate and the relationship of the beneficiary to the decedent, New Jersey’s inheritance tax can reach 16%. The other 17 states also have their tax hands out when someone dies. Most people want to get as much of their wealth as possible to their children or their family members. Moving to Florida can be an important part of implementing that plan.
Tax benefits do not stop with income and inheritance, but extend to property taxes. Homestead property gets a lot of perks. Homestead is most easily defined as one’s primary residence. Application to qualify property as homestead must be made with the County Property Appraiser. Once homestead tax status is obtained, it has many tax benefits.
The first $25,000 of value is exempt from all property tax. An additional $25,000 exemption applies to value between $50,000 and $75,000, but only to non-school taxes. Sadly, school taxes account for almost one-half of the total tax millage so the second $25,000 exemption is only about half as good as the first. Other exemptions available to homestead property include widow or widower, veterans and disability.
The Florida Constitution provides an additional tax benefit for homestead property. The maximum increase in assessed value for taxes on homestead property is set at the lesser of 3% or increase in the Consumer Price Index. That is referred to as the Save Our Homes exemption and over time can save thousands of dollars in property taxes.
The income tax and estate tax benefits are automatic; the property tax benefits are not. To obtain the property tax benefits, the resident must complete an application with the County Property Appraiser no later than the end of February for the year in which the resident wants the property considered homestead for tax purposes. That application must establish that the property was the resident’s primary residence as of January 1 of that year. In Collier County, the Property Appraiser requires the following, all of which must be dated prior to January 1 for the tax year for which the resident seeks homestead exemption: 1. Deed or tax bill with the resident’s name; 2. Florida Driver’s License; 3. Florida Auto Tag registration; 4. If a registered voter, Collier County
Voter Registration Card; 5. Social Security Numbers for the applicant and spouse; 6. If property is owned under a trust, a copy of the trust. The Property
Appraiser reviews the trust to confirm the applicant has a beneficial interest in the trust, which generally means the right to occupy the property.
Homestead property has yet another benefit. Under Florida’s Constitution, it is exempt from creditor claims, except for taxes and assessments, obligations contracted for the purchase, improvement or repair of the property or liens which voluntary placed against the home. That constitutional protection is unlimited in dollar amount, but is limited to 168 acres if located outside of a city and one-half acre within city limits.
Florida residents enjoy other protections from creditors. Florida protects the cash value of life insurance, IRAs and annuities, retirement accounts and certain business structures. Property and accounts owned by a husband and wife, as a tenancy by the entirety, are also exempt from the claims of one spouse’s creditors.
Tax benefits, creditor protection and a year round climate that all can enjoy; all seem to be there for the taking. But, much can go wrong if the move to Florida is not properly completed.
Many “Floridians” keep their northern home. They are under the impression that if they pretend to live in Florida for 183 days each year, they qualify as Flo- ridians and can claim all of the Florida resident benefits. But, determination of primary residence (or domicile) can be a complicated fact matter that goes beyond a 183-day claim. It can include such factors as where one claims to reside for federal income tax returns, where financial statements and other important mails is addressed, where one visits the doctor, and any club memberships. If a northern state wants to claim income or an estate and tax it, the claim starts with the argument that the purported Florida resident never really left the northern state, because he or she kept a home there. It moves on to analysis of credit cards and travel records and into a review of all facts that might refute a claim that Florida is the primary home. That fight can be expensive, even if one “wins.”
A “Floridian” can also run into problems when the tax collector finds out that one spouse claims Florida as a homestead while the other claims the northern state. Florida statutes clearly limit each family to a single homestead. When a husband and wife live harmoniously and arrange deeds with one owning each of two homes (so they can get a tax break in two different states) Florida may retroactively revoke a Florida homestead qualification and send a bill for unpaid taxes, penalties and interest (and possibly pursue criminal action).
Florida residency can have tremendous financial benefits. But, those tax benefits may not be automatic. Because they are of significant value, they are worth protecting by good planning and consultation with qualified professionals..
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.