Elon Musk, who says he has relocated to Texas from California, is just the latest billionaire to announce a move that could deliver big tax savings.
The mechanics of how the rich can enjoy those savings, however, are complicated and involve jumping through a few more hoops than simply announcing that they have moved from Los Angeles to Dallas, or New York to Miami. Spending a certain number of days out of the state, or changing documents like voter registration and drivers’ licenses, are unlikely to be enough.
Take, for example, California, which Musk has decried as “complacent.” About 700 auditors are employed by the state's Franchise Tax Board, according to a spokesman for the agency. For many of them, the sole job is to check on taxpayers who have claimed to have left the state. Residency audits can take years to complete, and include scrutiny of business relationships, family and community ties, and the location of prized possessions like artwork and heirlooms.
“People leaving California have to actually take the many inconvenient and costly steps to actually change residency under California law,” said Christopher Manes, an attorney specializing in the topic based in Palm Springs. “For Musk to change legal residency for tax purposes, he’d have to disentangle himself from his California contacts to the extent that the center of his life moves to Texas.”
What’s more, the state’s rules say even non-residents must pay taxes on income that come from California sources. That could include the proceeds of options earned while Musk was a resident, or profits from businesses operating in the state.
He shares joint custody of five teenage sons with his ex-wife Justine Musk, and has thousands of employees in California — which could be seen as evidence of continued strong ties to the state. He remains the chief executive officer of both Tesla Inc., headquartered in Palo Alto, and SpaceX, based in the Los Angeles area where he has lived for two decades.
Musk didn’t respond to an e-mail seeking comment.
Going Out of State
Still, the wealthy can save millions of dollars by moving from a state like California, which levies a top rate of 13.3% on income — the highest in the nation — to states like Texas, Nevada and Florida, which have no income tax at all. They just have to convince auditors or courts that they really have left.
It’s a process that the very rich will increasingly have to contend with, as moves such as Musk’s accelerate both on the west and east coasts.
Fund manager Jeffrey Gundlach floated the idea of leaving California for a low-tax state earlier this year. The chief executive officer of Doubleline Capital criticized lawmakers in Sacramento for considering tax hikes on “job creators.” Celebrities have also moved out. This year, podcast host Joe Rogan said he was moving from Los Angeles to Texas shortly after signing a deal with Spotify Technology SA that could be worth more than $100 million.
Elon Musk, Joe Rogan and Ben Shapiro, to name just a few, are leaving California to escape incompetent governance. The “response” from Sacramento? Wealth and massive income tax increases on job creators (AKA “the wealthy”). Should I align with 3 smart guys, or Sacramento? Hmmm.
— Jeffrey Gundlach (@TruthGundlach) September 26, 2020
Relocating to Florida, meanwhile, has been popular for decades, particularly for older residents of New York — which levies a top rate of 8.82%. New York City also imposes its own income tax of as much as 3.876%.
Last year, billionaire Carl Icahn moved from New York to Miami, and President Donald Trump changed his official residence from Trump Tower in Manhattan to his Mar-a-Lago resort in Palm Beach.
“We’ve seen an enormous trend of the wealthiest family offices relocating to Florida,” Christopher Boyett, the co-chair of law firm Holland & Knight’s National Private Wealth practice, said. Some financial firms seem to be following their clients by expanding or moving operations into Florida. Goldman Sachs is considering opening a new Florida hub. Hedge fund titan Paul Singer is moving the headquarters of Elliott Management Corp. to West Palm Beach from midtown Manhattan.