Where are high-net-worth clients moving to avoid local taxes?
States such as Florida and Nevada apparently offer easier tax situations than do New York or California. But such moves don’t always ease tax burdens.
According to recent data, the toughest tax states for top earners are California, New York, Vermont, Minnesota and New Jersey. Other states with nasty taxes on the wealthy are Illinois and Connecticut.
“I seem to be having the change-of-residency conversation much more often,” said James McGrory, CPA and shareholder with Drucker & Scaccetti in Philadelphia. “With the limitation of the state and local tax [SALT] deduction to $10,000 annually, wealthier clients … have lost out on thousands of dollars that had been deductible,” he said.
Wealthy taxpayers in high-tax states are considering moves to Arizona, Florida, Texas, Nevada or Tennessee, among others. Florida offers such benefits as a homestead exemption, said Daniel Morris, a senior partner at Morris + D’Angelo in San Jose, Calif. “Texas is popular for younger and working-age professionals, families and businesses,” he added. “Uber-wealthy who desire more privacy, greater freedom, expansive liberty and clean air like Wyoming."
Washington, New Hampshire and Texas are also popular, he added, but the “wealthy should consider estate planning before moving to Washington, as Washington imposes an estate tax that surprises many people.”
Yet migrations may not be living up to headlines. “This shift isn’t as common as the news has you believe,” said Ryan Lane, CPA with The Bonadio Group in Pittsford, N.Y. “Taxes play a role in our decision to move [but] many of these movers already planned on leaving their state upon retirement.”
“The majority of my clients tend to move closer to their children and grandchildren,” said Jamie F. Block, CPA/CFP with Mercer Advisors in Rochester, N.Y. Destination states have also included Massachusetts, Oregon and Colorado, she said. “These states tend to be mid-to-higher tax states, but they offer more opportunity for young families,” she added. “Another trend is people leaving to countries such as Canada and England.”
Clients of Mary Kay Foss, a CPA in Walnut Creek, Calif., have moved to Texas, Nevada and North Carolina partially to save taxes. Only one stayed there for more than a year or two. “The Northern California culture isn’t matched well in Texas or North Carolina. They’re surprised at the lack of restaurants serving the wine and entrees that they’re used to. Nevada is less of a surprise … Reno and other communities near Lake Tahoe are popular.”
“After weighing all of the considerations, they decide not to make the move,” said Rachel Efthemes, CPA, senior manager in the private client services group at Mazars in Edison, N.J. “Most clients have the misconception that if they just spend more than half of the year in Florida that New York will accept their change and they’ll no longer be considered a resident and taxed by New York. This is far from the case. They have to make [other] significant changes.”
These changes—which includes steps to head off a residency audit, as state tax authorities look to collect taxes from supposedly former residents—include filing a declaration of domicile; obtaining the new state’s driver’s license and relinquishing the old one; registering to vote in the new state; and executing new wills and powers of attorney, among other moves.
Morris has another warning: “Low-income tax jurisdictions make up revenue other ways. Property taxes, DMV fees, user fees, sales taxes, wealth-based taxes, lower levels of governmental services, challenges to public education funding and so on. The grass may be greener, [but] the water bill is frequently higher.”
Other changes from tax reform can also figure in the decision to move or stay. For example, many wealthy taxpayers might now be eligible for the new qualified business income (QBI) deduction. “While they lose out on the state and local tax deduction, they’re still in a better tax situation after accounting for the QBI deduction, if they qualify,” Lane said.