This tax season, many wealthy Americans are getting an expensive jolt.
The Republican tax overhaul signed by President Donald Trump more than a year ago provides plenty of perks for the rich. But not all well-off folks are treated alike under the new law. A controversial provision that helps pay for huge corporate tax cuts punishes residents of states with higher income taxes—most of which, but not all, lean Democratic.
By setting a $10,000 cap on how much Americans can deduct in state and local taxes, or SALT for short, Washington created a pricey problem for the privileged in some parts of the country. Now that the first tax season under the overhaul is here, that reality is hitting home—and the thought of moving to a low-tax state may suddenly look more attractive.
But even before the law, there were rich people in blue states trying this strategy. Some actually moved, while some just pretended to—and that’s where state tax auditors come in. Officials in places such as California and New York don’t make it easy for the rich to say goodbye, with investigators who dig deep, forcing residents to prove they really have cut ties in favor of cheaper pastures.
“You have to abandon the old and establish the new,” said Karen Tenenbaum, a New York lawyer who specializes in residency disputes. “The more ties you cut, the better—auditors like to see a moving van and an itemized list of what was moved.”
James Gazzale, a spokesman for New York’s Department of Taxation and Finance, echoed her sentiment, albeit more formally. “Ensuring taxpayers pay their fair share is a top priority; therefore, our nonresident audit program continues to be very active,” he said.
Here are a few of the more colorful examples of litigation between wealthy residents who claimed to have moved and jilted states that didn’t quite believe them.
The Teddy Bear Test
Gregory Blatt was a rising star at InterActiveCorp (IAC) when in 2009 billionaire Chairman Barry Diller asked him to take over as chief executive of Dallas-based subsidiary Match.com.
At first, Blatt was reluctant to move. Just 40 years old, he was single, loved to spend summers in the Hamptons and had just remodeled his $2.4-million West Village apartment, according to the New York Division of Tax Appeals’ ruling on his case. At first, he negotiated to work out of IAC’s New York headquarters most of the time, traveling back and forth to Dallas when necessary. After a few months as Match’s CEO, however, Blatt testified that he had actually fallen in love with Dallas.
He joined a gym there, rented an apartment in one of the city’s nicest buildings, made friends and dated. When he filed taxes as a Texas resident in 2009 and 2010, however, New York started asking questions. Tax authorities could point to the fact that, just two years after moving to Dallas, Blatt had actually moved back to New York to take over as CEO of IAC itself when Diller stepped down.