Some high-net-worth clients are being hit hard in high-tax states by added burdens from reform -- some even to the point of packing up for supposedly lower-tax states.
Many clients are impacted chiefly by the new $10,000 state and local tax and property deduction cap of $10,000, especially in the nation’s wealthiest states. Three potentially hard-hit states: New Jersey, New York and California. “There has been an uptick in discussions surrounding relocating [but] we haven’t seen a lot of actual movement,” said Barry Kleiman, CPA and principal with Untracht Early in Florham Park, N.J.
“My clients would likely not relocate unless they were already considering a move for other reasons,” said New York CPA Sallie Mullins Thompson, who also reminds HNW clients that the tax law could change before the laws sunset in 2025.
When California recently raised its tax rates, there was an exodus of some HNW taxpayers. But, said Mary Kay Foss, CPA in Walnut Creek, Calif., “When you’re looking at the SALT deduction, it gets complicated. California has very high income-tax deductions but relatively low property tax deductions. When people are considering a move, they’re more likely to compare income tax or sales tax rates. Property taxes are more difficult to research.”
A migration from high- to low-tax states has been occurring for years, according to Leslie Thompson, Indianapolis-based managing principal at Spectrum Management Group. “It’s more likely that it results from baby boomers retiring and moving to states with better weather, amenities and overall lifestyle,” she said. “Many of these states happen to have no or low income taxes.”
Among other tax considerations besides the SALT cap, according to Sallie Thompson: Programs that the family uses could be less generous in other states; the new state being a community property state could impact any eventual divorce or separation; and even new states lacking an income tax could have other taxes.
“Clients have thought about relocating and then are surprised when I demonstrate that their taxes are either staying the same, going down or going up just slightly,” said Gail Rosen, CPA with Wilkin & Guttenplan, Martinsville, N.J.
First, how cheap is the new state? “Florida, for example, while lacking a state income tax, is not the lowest net tax-cost state according to tax analysts and economists,” said Daniel Morris, a CPA and senior partner at Morris + D’Angelo CPAs in San Jose, Calif. “Housing, employment, weather, political philosophies, cultural opportunities and other living attributes should outweigh a pure economic discussion.”
A client needs real commitment to a move. “Changing their driver’s license, voter registration, estate plan (such as having a will drafted in accordance with the law of the state they intend to move to), car registration, possibly selling their current home,” said tax supervisor Ryan DiPeri, CPA, with Bederson LLP in Fairfield, N.J. “States have the ability to perform residency audits following a taxpayer’s move out of their former state.”
“Good records must be kept to support a move,” Kleiman said. “Certain states are more aggressive than others and HNW clients are more at risk. Clients should also keep in mind that states impose a tax on non-residents with income sourced to that state. Likewise, if a client moves out of a state but maintains a home in-state, any gain on the eventual sale will be taxed by that state.”