If you are a Michigan resident who spends more than half of your year in Florida, you may be wondering whether it is advantageous to officially change your residence to Florida. As with all tax and estate planning matters, the answer will vary depending upon your unique situation. However, the most common considerations deal with income taxes and exemptions for homestead (Florida) and principal residence (Michigan).
Income Tax Considerations
In Florida, there is no state income tax. So, while income earned in another state will continue to be subject to that state’s income tax, income earned in Florida will not be taxed. Similarly, for a Florida resident, unearned income will not be taxed. Unearned income includes retirement benefits, dividends, and interest. Exempting these income sources from state taxation by becoming a Florida resident can be a huge tax savings.
Real Estate Exemptions
With respect to loss of your Michigan principal residence exemption, there are common misconceptions. While it is true that changing your residence to Florida will result in the loss of your Michigan principal residence exemption – since both Michigan and Florida only allow residents to claim their respective exemptions – the residence exemption only exempts the home from local school district taxes up to 18 mills. A mill refers to the tax due on each $1,000 of your home’s assessed value. As such, a Michigan principal residence exemption will save you $4,500 in taxes each year on a home with a state equalized value of $250,000 (or fair market value of $500,000). However, loss of the principal residence exemption does not uncap your property taxes. Accordingly, if you have an artificially low taxable value due to owning your home – or the home staying within your family – for a long time, that taxable value will not change. Rather, the tax loss on trading in your Michigan principal residence exemption for Florida residency is due to the school district taxes described above.
It is important to note that changing your residence to Florida means that you will forego the Michigan principal residence exemption even if you do not claim a homestead exemption on a Florida property. The ability to claim a Michigan principal residence exemption only looks to the state in which the individual resides, not whether the individual claims a real estate exemption elsewhere. Finally, claiming Florida homestead can offer creditor protections, so be sure to consider claiming the exemption if you do decide to legally change your residence to Florida.
Clearly, there are many tax points to consider in determining whether to change your residency from Michigan to Florida. The answer will depend upon your unique circumstances, taking into account your earned and unearned income, the source of any earned income, the tax consequences of losing your Michigan principal residence exemption, and the tax benefits of qualifying a Florida property under the homestead exemption. If you have questions about changing your residency, feel free to contact Mammel Law at 248-644-6326.