It is our observation that wealthy people are moving out of high-tax states, such as California and New York. Particularly for high-net-worth and ultra-high-net-worth individuals and families, where you live can impact your tax obligations and overall net worth over time.
When you look at the data, the trend is clear. For example, West Palm Beach, Florida, saw a 90% increase in millionaires living in the city from 2012 to 2022, while Miami experienced a 75% increase over the same period. Those two cities are No. 2 and No. 4, respectively, on the list of the fastest-growing U.S. cities for millionaires.
So what is causing this acceleration of families of wealth seeking to change domiciles? In my opinion, there are two primary contributing factors:
First, the Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct state income tax for many wealthy individuals, making it particularly painful from a tax standpoint to continue living in high-income-tax states.
Second, COVID has encouraged many people to reevaluate how and where they want to live their lives. The answer for many has been to move to a low- or no-income-tax state that fits their lifestyle.
To be sure, changing domiciles is a topic that comes up more frequently among families of wealth, especially those who are approaching a potentially significant taxable event, such as selling a business. With all the interest, many lingering misconceptions about changing your domicile persist.
Below are five common myths and the realities behind them:
1. I have to spend at least half a year and a day in a low-income-tax state to qualify as a resident.
That is false. Don’t focus on where you are; focus on where you aren’t. It’s more important to spend less than half a year in the state you do not want to be domiciled in than it is to spend more than six months in the state you do want to domicile in. For example, let’s say you want to move out of New York and become a resident of Florida. If you spend three months living in New York and then four months living in Florida and five months traveling through Europe, you could qualify as a Florida resident, even though you didn’t live there for more than six months. As long as you went through the necessary steps to treat Florida as your true home, you would still be considered a Florida taxpayer, even though you spent less than half a year there.
2. All state auditors are the same in how they investigate (or audit) residency.
That is also false. There is a significant discrepancy in how aggressively residency audits are pursued in different states. For example, states like California and New York have triggering rules that can result in an aggressive audit, whereas other states are far more relaxed. It’s important to know how aggressive the state you plan to leave — or at least not domicile in — is when determining the likelihood of an audit. Moving out of a state before you sell a business could still result in a sizable taxable event in certain circumstances, for example.
3. If I move to another state before I sell my business, I won’t have to pay taxes on the sale in my former state of residence.
It depends on what you are selling. If you are selling an “asset,” those assets may have a “home” for tax purposes. In the tax world, we call this having a tax “nexus.” Things like property, real estate and equipment all have a state of residence. But “equity,” such as stock or a partnership interest, doesn’t have a “home.”
For example, if you have a real estate business, and you move from one state — let’s say California — to Nevada and then choose to sell, you would likely still owe California income tax on the sale. You may not live in California anymore, but your business still “lives” in California, at least according to state auditors. Alternatively, if you own stock in a company that is headquartered in California, and you sell that stock after living in Nevada for two years, you would not owe California income tax, as securities generally don’t have a tax nexus.
As you can see, the tax consequences depend on the type of asset you plan to sell.
4. The tax consequence isn’t “that big” if I stay in my current high-income-tax state.
Sorry, the reality is the long-term impact of reducing or eliminating state income taxes by moving to a low- or no-income-tax state can amount to millions of dollars for wealthy families over many years. Based on Geller’s tax projections for various families, we’ve concluded that some of our very own clients could save upward of tens of millions of dollars over a few decades. Over time, the power of compounding by saving 5% to 10% on state income taxes is absolutely a big deal for families of wealth.
5. They’re never going to catch me if I “fudge the truth” a bit on where I’m living.
Don’t try this. Technology today makes it much harder to mislead state auditors about where you are actually living. For example, just having a cellphone makes it easy for states to monitor where you are to establish residency. All an auditor has to do is look at the ad history on your phone or look at the cookies in your browser to determine where you have been at any point in time. In essence, it’s much harder to get away with trying to “game the system” when it comes to establishing residency. Be honest and straightforward. Doing so will make any potential audit much less painful.
This material is provided for general and educational purposes only, is not intended to provide legal or tax advice, and is not for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other adviser regarding your specific legal, investment or tax situation.