Since the pandemic, there is a higher mobility on the working force and even companies switching headquarters to more tax friendly environments. As a member of the Philadelphia Tax Reform Commission, we considered extremely relevant the comparison of State and Local taxes in different territories. Taxes is one of the factors for business and individual mobility, and increasing taxes might generate an exodus of wealthier taxpayers that might contribute in higher measure to the State and Local budgets.

In the recent years, there are many States that have increased taxation in their higher tax brackets or created wealth taxes:

  • New Jersey – In 2020, the 10.75% rate applies for taxable income over $1 million (previously, started in $5 million)
  • New York – In 2021, they added three additional tiers ranging from 9.65% to 10.9%.
  • Massachusetts – In 2023, they established a “millionaire’s tax”. Those with taxable income over $1 million are subjected to an additional 4% surtax
  • California – In 2024, the 14.4% rate applies for taxable income over $1 million

Some of these measures have backfired as wealthier individuals are leaving these States. What is left for those States where individuals are fleeing?  They do residence audits to ensure do not miss any of their respective income taxes, especially if a large liquidity event occurred. We have the following recommendations:

  1. Physical presence – Some ways to show the physical presences are a) moving documents, b) lease start date or purchase of home, c) Driving license of the new State, d) utility bills, e) mail address for bank statements / credit cards,  etc.
  2. Forging personal and financial connections – Showing that your life is in the new place might include a) school enrollment, b) memberships to clubs or other organizations, c) w2 or other sources of income in that location (see point 4 below), etc.
  3. Ending ties with previous State – This is just the opposite to point 1 above, which includes a) lease cancellation, b) sale of previous home, c) subscription cancellations to previous home, etc.
  4. Ensure to communicate your employer or transfer business – It is extremely important to update your income sources. If you are a w2 employee, you should indicate HR to update the State income and State withholding in writing and make sure your paystub appropriately reflects the change. If you are a business owner, you might transfer the business or open a new entity in the new territory reporting income appropriately.
  5. Careful with social media – The revenue agents might review your posts, pictures and similar on social media (or even from your spouse, children, etc.)  to support the State’s case.

 

Note that residency could be a hard topic and in some cases, you can have a tax home as the principal place of business and a second location where the business expenses might be deductible if running a business there (See case Andrews vs Commissioner).

Regarding residency transfer, you should consult with a tax professional. Each case is different and needs to be tailored to you.

 

Link The Tax Adviser – Wealth migration and change of domicile

Link Justia – Andrews v. Commissioner of Internal Revenue,