Wealthy Must Do Careful Assessment Before Moving To Lower-Tax State | Financial Advisor


Wealthy Must Do Careful Assessment Before Moving To Lower-Tax State | Financial Advisor

SEPTEMBER 17, 2018 

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.”

“One consideration may be related to a client’s municipal bond portfolio,” DiPeri added. “An individual holding many bonds of a state they don’t live in will be taxed in their [new] home state, as the bonds aren’t tax-exempt from state income tax.”

Some states have attempted to work arounds the deduction cap. “Some allowed individuals to make a deduction to a fund set up by the state and then take credit at the state level,” said Geoff Christian, Greenville, S.C.-based managing director at CBIZ MHM and leader of the national state and local tax practice. “While the IRS initially disallowed those workarounds, it just said it would continue to allow businesses to contribute to these funds and allow individuals to take a credit.”

Scott Donnelly, CPA and partner at PDM CPAs in Torrance, Calif., suggests clients also move (literally) slow. “While renting in the state they are considering they should keep their current residence,” he said, “in case they change their mind.”

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