Navigating Dual Residency Taxes in Retirement:
Implications and Strategies
Table of Contents
Many retirees enjoy the best of both worlds, winters in the sun and summers up north, but this lifestyle can open the door to dual residency and potential tax headaches. While there is an appeal to living in two places, the tax implications can be complicated. Without careful planning, retirees may face double taxation, increased audit risk, and added compliance worries. Understanding how dual residency works, and how to manage it effectively, is key to protecting your retirement income and avoiding costly surprises.
Clarifying Dual Residency and Tax Obligations
One of the most important distinctions for retirees to understand is the difference between domicile and residency:
- Domicile is your true, fixed, and permanent home—the place you intend to return to.
- Residency, meanwhile, can be established just by spending a certain number of days in a state or maintaining a home there.
Most states use some variation of the 183-day rule, if you spend 183 days or more in a state, it may claim you as a resident for tax purposes. But that’s not the only factor. States may also look at where you’re registered to vote, where your car is registered, the address on your driver’s license, why you are spending time in the state, or even where your doctors and financial institutions are located.
Failing to clearly establish one state as your primary domicile can result in both states attempting to tax your income, leading to double taxation. This is especially common in cases where retirees split their time between high-tax and no-tax states, or between two states with differing rules about what income is taxable.
Understanding Retirement Tax Implications
For retirees, dual residency affects how various sources of income are taxed:
- Social Security benefits are exempt from state taxes in most states, but not all1. A few states do tax a portion or all of your benefits depending on income.
- Pensions and annuities may be taxed in your state of residence, depending on where the benefits were earned and where you now live.
- Investment income, such as dividends and capital gains, is typically taxed by your resident state, even if the assets are held elsewhere.
Consider a common scenario: a retiree living most of the year in Florida (which has no state income tax) but owning a second home in New York. If New York determines that they are still a resident or statutory resident, the retiree could be subject to New York state taxes on their entire income, even income earned while living in Florida.
Understanding how each state views different types of retirement income is crucial for tax planning and compliance.
Common Challenges Retirees Face with Dual Residency
Many retirees are surprised by how difficult it is to prove where they actually live. Even if you believe your domicile is in a low-tax state, tax authorities in a higher-tax state may think otherwise, especially if you maintain a residence there or spend substantial time visiting.
Some common challenges include:
- Proving primary residency when you split time fairly evenly between two homes.
- Residency audits, where states examine travel logs, utility bills, credit card statements, and more to determine where you “really” live.
- Tracking income across states, especially if you have rental income, part-time work, or other streams tied to specific locations.
Without diligent recordkeeping and proactive planning, retirees may find themselves in costly disputes with tax authorities.
Strategies to Minimize Dual Residency Tax Burdens
Residency Planning
Establishing and maintaining a clear primary residence is one of the best ways to avoid dual taxation. Retirees can strengthen their case for domicile by:
- Changing your driver’s license, voter registration, and vehicle registration to your chosen domicile state
- Using that state’s address for your mailing address, bank accounts, insurance policies, and tax returns
- Minimizing time spent in your non-domicile state—ideally under the 183-day threshold
- Keeping logs or receipts that show your location throughout the year
Consistency is key. All of these signals combined create a stronger case that your primary residence is in one state, not two.
Income Allocation and Tax Planning
Retirees with income sourced from multiple states should work with a professional to correctly allocate income. This may involve:
- Allocating part-time wages or rental income to the correct state
- Structuring investment withdrawals or retirement account distributions to minimize tax impact
- Considering Roth conversions in low-tax states or years when income is lower
- Timing the sale of appreciated assets when you’re domiciled in a no-tax state
Every situation is different, and proper planning can lead to meaningful tax savings.
Professional Tax Guidance
Because multi-state tax law is complex and state enforcement can be aggressive, it’s often wise to bring in professional help. Retirees should consult:
- CPAs or tax attorneys experienced in dual-state taxation
- Financial planners or wealth managers who can coordinate tax strategies with income and investment planning
Professionals can also help defend against audits, correct residency designations, and ensure that income is reported appropriately on each state’s return.
Conclusion
Retiring across state lines may offer lifestyle benefits, but it comes with tax complexities that shouldn’t be ignored. Without clear planning, retirees may find themselves navigating audits, paying more than they should, or unintentionally violating residency rules.
The good news? With proper planning and guidance, you can reduce your risk and protect your retirement income. Be proactive, stay organized, and work with a professional team that understands multi-state tax laws.
Not sure where you stand? Reach out to our team at Insight Wealth Strategies to get help building a tax-efficient retirement plan tailored to your lifestyle, no matter how many states you call home.
Reviewed by,
Brian Stormont, CFP®
Brian Stormont is a comprehensive, fee-only financial advisor with Insight Wealth Strategies who began his career in the financial industry in 2000. His expertise encompasses retirement planning, investment planning, estate planning, and high-level strategies to help business owners and individuals minimize their income taxes.
Sources:
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