For company founders and shareholders with an exit on the horizon, this isn’t a myth — a move for tax reasons can make a lot of financial sense.
In tech hubs like the Bay Area and New York City, the highest tax brackets are at 14.4% (as of 1/1/24) and 14.8%, respectively. In contrast, states like Florida and Texas have no state income tax, meaning there’s no capital gains tax at the state level.
Let’s consider the numbers: On a $30 million exit, a founder could save approx. $4.3 million by moving from California to Florida or approx. $4.4 million by moving from New York City to Florida. That’s a lot of incentive to pull up the stakes and head to Miami.
However, many times it’s not that simple. We all know that moving can be a tough decision, especially for those with strong roots in their community. Leaving behind your favorite golf course, local ski mountain, and your friend group can have a serious impact on your quality of life. And it can be heart-wrenching to pull your kids away from the home, friends, and school they know and love.
This is where some people can get into trouble.
What you need to know about moving to save on taxes
Paying less in tax isn’t as simple as packing up, skipping town, and resurfacing with a new address in a tax-friendlier state.
As tempting as it may be, you can’t keep a foothold in Silicon Valley while dipping your toe in the Gulf Coast — and still save on taxes. The kids may be unable to stay in their Manhattan private school while you relocate to Miami.
As tempting as it may be, you can’t keep a foothold in Silicon Valley while dipping your toe in the Gulf Coast — and still save on taxes.
Living in both states won’t save you here; when it comes to taxes, you must be all-in at your new address, or you’ll likely owe tax at your old address. Unfortunately, some may not realize this until after they have spent a lot of time, money, and emotional investment.
Every state has its own rules for determining your residency for tax purposes, and you will not be able to fly under the radar if you’re a high-net-worth individual or top earner. High-tax states like NY or CA pay especially close attention to those in the highest tax bracket. If you stop paying taxes at the state level, chances are the state will notice and challenge your new residency claim.
In other words, your move is likely to trigger an audit.
In particular, California’s Franchise Tax Board is known to be vigilant in monitoring individuals who attempt to terminate their California residence, making it all the more crucial to thoroughly plan and document your move.
Additionally, it’s important to consider the complexities of community property laws, which may impact your tax exposure if you have a spouse residing in California, even if you move to a lower-tax state. Proper legal and tax advice is essential to navigate these complexities and ensure a smooth transition.
Many people mistakenly think that splitting time between states and claiming the more favorable tax jurisdiction is easy. But when you have the means to travel and maintain more than one home, this doesn’t mean you get to choose the domicile that works most favorably for you when tax time comes. Simply spending 183 days of the year outside your high-tax state isn’t likely going to shrink your tax obligation.
Even after leaving high-tax states like New York or California, it’s important to be aware of potential tax obligations tied to passive income sources within those states. For example, if you continue to have passive income from partnerships, investment properties, or other sources within New York or California, you’ll need to file a non-resident return and pay taxes on that income in those states.
Additionally, having passive income sources in your former state can increase the likelihood of a residency audit. As a result, it’s important to carefully consider whether retaining those investments producing state-specific income aligns with your overall financial and tax planning goals.
Preparing to move
If you’re considering a move to a lower-tax state, it’s crucial to plan ahead and be prepared. The more time you give yourself before your company’s exit, the better off you’ll be. We recommend making a clean break from your high-tax state several years in advance to ensure a smooth transition. It’s also wise to assume that you may be subject to a state tax audit, so keeping meticulous records and being prepared is crucial.