- As a tax attorney, Mark Klein has seen wealthy individuals continue to move to tax-exempt states.
- While savings are the main reason, cultural fit also plays a role in offshoring.
- For movers, it’s not as simple as getting a driver’s license: you have to prove that you live there.
This essay as told is based on a conversation with Mark Klein, partner and chairman emeritus of Hodgson Russ LLP, specializing in tax law. The conversation has been edited for length and clarity.
I’m a tax attorney specializing in residency issues, and half my job is helping people move to other states without triggering all sorts of nasty taxes – and, in other cases, avoiding taxes high and go to low-tax states.
When people realize they have more flexibility, and if all things are equal, why not save a lot of money?
Many of my clients don’t just put money in their pockets. They use it for good things, they use it for charitable purposes that are important to them, and they just don’t like what the government seems to be doing with that money, so it makes sense to them.
One of the reasons Florida’s real estate market was booming post-Covid is because people realized they could work just as effectively from anywhere. We didn’t need to go to the office when we could just as easily get by with a computer and a phone. And so a lot of people moved to Florida.
Finance is important, but so are advisory services. If you’re a consultant, you just need to be where the phone is.
I thought we saw most of the move right after Covid, but no: it seems to have continued unabated.
And we see a lot of people taking advantage of liquidity events. They are about to sell their business they have been working in forever. In New York, depending on your income, you might pay 15% tax on everything you earn, so you sell your business for $100 million, which is a lot of money, but $15 million comes from only taxes.
People believe that they could do much better with $15 million than the government. I think that’s one of the reasons we’re seeing continued pressure for people to move to places like Florida, Nevada, Texas or elsewhere.
The more income you have, the more flexibility you have.
Saving money is an important factor, but not the only one
Some of my clients are billionaires with a capital B and they have huge sources of income that wouldn’t be taxed by a state like New York if they were just Floridians.
They can continue to come back to New York from time to time and keep a place in New York. Some of them even have their own plane, so they don’t worry too much about waiting in line at TSA. They can go where they want when they want, and it saves them a lot of money.
My clients are all over the country. I think Nevada became very popular, especially the Lake Tahoe area, for people who were staying in Los Angeles or the Silicon Valley area. You can live on one side of Lake Tahoe and pay no taxes, while on the other side of Lake Tahoe you can pay California taxes, which are about 12%.
We see people moving to Wyoming, mostly because there are no taxes. And people love nature and their ability to commune with wild animals. This seems to be popular.
Some people even move to Washington state, which doesn’t really tax you unless you’re a billionaire. It depends on your interests. Some people love nature and so Wyoming would be perfect. Some people are attracted to the Miami scene.
The crossing from New York to Florida remains the most popular, particularly on the east coast of Florida. We find that a lot of people from New York and Long Island find that the culture is somewhat the same on the East Coast, whether it’s Palm Beach, Boca, Delray or Miami.
Obviously, Florida has a tremendous attraction in the winter, given that you can leave Florida in the middle of summer and hurricane season.
People with means absolutely end up in Florida, but I don’t think it’s just for the money. I also think it’s a better way of life. They can drive to the grocery store in the middle of winter without worrying about icy roads. But saving 15% is definitely some kind of gravy.
To avoid an audit, you need more than paperwork
Many people don’t understand the rules. The common misconception is that if I go to Florida and spend 183 days or more there, I am a Floridian. And nothing could be further from the truth.
The law says you have to move to a place like Florida and you have to prove that you did so by clear and convincing evidence. Now, I don’t know what that means, but I know what it doesn’t mean.
If you’re in New York for six months and Florida for six months, it’s not clear or convincing. It’s anything but. The other misconception is that people think that if they go to a place like Florida, they fill out an affidavit of domicile, they register to vote, they get the exemption from property and a driver’s license, one way or another the residence fairy will tap them on the shoulder. and make him a Floridian.
Should you do these things? Of course. But states don’t have much respect for paperwork. If I went to Florida now and filled out a bunch of paperwork, does that make me a Floridian? No, that just means I’m really good at paper. It’s the way you live your life. People who want this to work have to be willing to change the way they live.
God forbid you get sick and come back to the tri-state area for medical care, it’s no big deal. We hope people will seek the best medical care possible. But if you need to go to the dentist to get your teeth cleaned, shouldn’t you go to a dentist near you? It is very unusual for people to travel 2,500 miles north just to have their teeth cleaned. It’s the kind of thing we do at home.
An even better indicator is to tell me where your spouse is. Most spouses wait at home when the other spouse has to travel for business. Tell me where your dog is. Who keeps their dog with them when they go to work or when they are on vacation?
Where do you sleep at night? There are a lot of people here in Manhattan who don’t pay a cent of New York income tax, even though they’re here every day and their job is here.
We look at what they call the “near and dear test,” where are the things that are important to you?
The assumption is that most people have their good things – their nicest things – in their homes. This is really going to sound weird if you don’t claim to be a New Yorker, but you have a $5 million piece of art on the wall, and your Peloton is here, and your best golf clubs and your Steinway piano , or whatever you’re passionate about, you’re in New York.
Auditors look at that too. We always tell people that getting a residency check is a bit like the tax version of a colonoscopy. It’s very intrusive.
The political climate is not really favorable to the super-rich, and they feel a little disadvantaged. Here in New York, the top 1% of taxpayers pay almost 50% of New York City’s income tax. One percent pays 50%. The idea that my clients are being told in the press that they are not paying their fair share and that we should raise their taxes does not sit well with them.
They feel like they’re doing their fair share, paying more than their fair share, and making them pay more because they can, that scares people away. And people are much more mobile than before due to the pandemic.
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