Wealthy clients continue to move from high-tax to low-tax states for financial reasons. But they're not always considering the ramifications.
"A primary reason currently motivating clients to move to another state, or even another country, is tax savings,” said Joan Crain, global wealth strategist at BNY Mellon Wealth Management. “This grew following the restrictions on deductions on federal tax returns for state and local taxes because of the Tax Cuts and Jobs Act—the 'SALT deduction.'"
Recent proposals to double the capital gains tax rate, eliminate the step up in cost basis at death or impose an annual wealth tax have also “startled people into action,” Crain added. Though these are federal proposals, she said, “they could add significantly to an already burdensome state income and/or inheritance tax.”
In any case, wealth clients are feeling the heat. “Wealthy individuals have always contemplated moving out of states like California or New York in anticipation of a major transaction where they likely stand to realize significant gains, or even simply retirement,” said Christian Burgos, managing principal and state and local tax practice co-leader in the Pasadena, Calif. office of Friedman LLP.
Two hot destinations are Florida and Texas; neither has state personal income tax. “People leaving New York typically migrate to Florida. Those fleeing California generally make their way to Texas,” Burgos said. “Nevada and Washington are also states with no personal income taxes, [but] they don’t appear to have the same appeal.”
Clients might move at different times of life. “I’m not seeing mass exodus right now. For most of my clients, their work is based in California and doesn’t allow them to move. I have had a few move once they’ve retired,” said Robert S. Seltzer, a CPA at Seltzer Business Management in Los Angeles.
But advisors said clients need to think through their moving plans, because they don't always lead to the tax savings one might expect.
“Some states, specifically New York, have rules for teleworkers that assess tax on individuals who are working for employers located in the high-tax state, even though the employee is no longer residing in that state,” said Steven Rossman, CPA and shareholder at Drucker & Scaccetti in Philadelphia.
“Some clients are talking of relocating for tax advantages, but I think they often don’t think this through,” said Mary Kay Foss, a CPA in Walnut Creek, Calif. “Clients tend to focus on income tax changes and not on sales tax and property tax rates. They also forget to consider some of the intangible items.”
Change of residency often leads to a lot of inconvenience, especially for people with assets, advisors said. People need to dispose of significant assets like a primary residence in the old state, find a new school for kids, sever community ties and forge new ones, and find an array of new services providers, such as doctors and repair people. To establish "domicile," clients need to purchase and live in a home in a new state for more than 183 days each year.
Crain’s firm maintains a domicile checklist for relocating clients that includes gathering information such as credit card and cell phone statements, tollway pass charges and flight records to substantiate physical presence; moving heirlooms, art and family photo albums to the new state; and updating estate planning documents.
“Changing domiciles or residency can be a red flag for the IRS,” warned Barry Gould, partner at the EisnerAmper Advisory Group in Miami. “We work through an extensive, custom plan with our clients to ensure when they can prove to be a bona fide Florida resident.” Strategies for saving taxes in a move include gifting, Roth conversions, trust and estate planning, an entity conversion and SALT-deduction workarounds, he said.
Many states have also implemented SALT tax workarounds for pass-through entities, allowing a federal deduction for the partnership for the state tax paid for the partners, Rossman added.
Even if clients save on taxes, relocations are still big investments in time and trouble. “Once you’re gone, stay gone, or at the very least limit any instance of travel back into the state,” Burgos said.
