When you move from California to Colorado and want to establish a new domicile for tax purposes, there are several key steps you’ll want to take to sever your ties with California and establish yourself as a resident of Colorado. Both states have different tax rules and residency requirements, so it’s important to consider the following actions for compliance under Colorado tax law and minimizing California tax obligations:
1. Establish Residency in Colorado
- Physical Presence: You must physically live in Colorado with the intent to remain indefinitely. Moving to Colorado and living there full-time is the first step.
- Colorado Driver’s License: Get a Colorado driver’s license as soon as possible. California will consider you a resident if you continue to hold a California license after moving.
- Register Your Vehicle: Register your car(s) with the Colorado Department of Motor Vehicles (DMV). Failing to do this can indicate that you still maintain ties to California.
- Voter Registration: Register to vote in Colorado. This is another indicator that you have fully transitioned your residency.
- Change of Address: Update your address with the U.S. Postal Service (USPS), financial institutions, credit card companies, etc. Make sure everything points to your new address in Colorado.
2. Sever Ties with California
- California Driver’s License: Surrender your California driver’s license (or allow it to expire) and replace it with a Colorado one.
- End California Residency-Based Obligations: This means canceling any memberships, club memberships, or ongoing business relationships that are tied to California.
- File a California Part-Year Resident Tax Return: When you leave California, file a part-year resident return for California (Form 540NR) to report your income earned in California up until the point you establish residency in Colorado. This will also show California that you are no longer a resident after a specific date.
- Document Your Move: Keep records of your move such as leases, utility bills, or a home purchase agreement, as these documents can prove you’ve established your new domicile in Colorado.
3. Reestablish Your Domicile in Colorado
- Primary Home in Colorado: Your primary home should be in Colorado, and you should make it clear that you intend to stay there long term. The primary residence should be where you spend the majority of your time.
- Social and Community Ties: Establish connections in Colorado—like finding new healthcare providers, joining clubs, and getting involved in your community.
- Income Reporting: If you are employed or self-employed, report your income as coming from Colorado. If you were employed in California at the time of your move, be aware of how California taxes income earned while you were still a resident.
4. File Taxes in Colorado
- Once you have established your domicile in Colorado, you will file taxes as a Colorado resident. Colorado has a flat state income tax rate, so unlike California’s progressive tax system, it might simplify your tax situation. Colorado residents are taxed on income earned worldwide, not just income earned in the state.
5. Consider any other Legal Steps
- Wills and Legal Documents: Review your legal documents, such as your will and estate planning, to reflect your new Colorado residency.
- Health Insurance and Other Benefits: If you had health insurance through a California-based employer, switch to a Colorado plan, or adjust your insurance according to your new residency.
6. Additional Considerations
- California’s “Exit Tax”: California is known for being aggressive in scrutinizing moves to other states. If they suspect you’re trying to avoid California taxes, they might conduct an audit or ask for more documentation proving your departure. Be prepared to defend the date you became a Colorado resident, and keep thorough records of your move.
- Keep Track of Time: Be mindful of the dates you establish your residency in Colorado. California taxes are based on the principle of “domicile,” and if you continue to spend too much time in California after your move, they might argue that you never really abandoned your California residence.
Conclusion:
Establishing a new domicile in Colorado and severing ties with California is a process that requires time and attention to detail. If you have concerns or a complicated tax situation (e.g., income in both states), it may be worth consulting a tax professional familiar with both California and Colorado tax laws.