More snowbirds are expected to make a permanent move as the curbs on state and local tax deductions are starting to be felt.
The Tax Cuts and Jobs Act of 2017 clamped a $10,000 limit on the amount of state and local taxes—including income and property taxes—that joint filers can deduct from their income for federal taxes.
Financial planners say that as high-net-worth taxpayers finalize their 2018 returns to meet the October tax-extension deadline, they expect many residents of New York, New Jersey, California and other relatively high-tax states will decide to spend more time in Florida, Texas, Nevada or other states that don’t collect income taxes, or move there outright.
“People are just starting to see the effect,” says Daniel Bernard, an attorney with Twomey Latham in Riverhead, N.Y. “Over the coming months we’re going to see a lot more people looking to establish Florida residency.”
An analysis conducted by Connecticut projected that residents of the state would pay an additional $2.8 billion in federal taxes on their 2018 returns because of the change in deduction rules. New York State Gov. Andrew Cuomo has complained that the deduction limit and other tax changes are prompting residents to flee to Florida.
Ed Wollman, a founding partner who handles taxes and estates with Wollman, Gehrke & Associates in Naples, Fla., says a New York City snowbird couple with taxable income of $500,000 would pay about $50,000 in state and city income taxes. A couple with the same taxable income in Illinois would escape a tax bill of close to $25,000 by moving to a no-income-tax state, he says. In New Jersey, the savings would be nearly $32,000, in California more than $46,000 and in Connecticut more than $32,000.
Nevada has seen an influx of California residents fleeing the state’s income tax for years, but the new limit on the federal deduction has pushed even more Californians to look at Nevada or other no-tax states, says Christopher Manes, a tax planner with Manes Law in Palm Springs, Calif. “Most of my clients are high-income individuals, so changing their residency from California has obvious benefits,” Mr. Manes says. “But for people in the $500,000 bracket, the state and local tax issues can be the straw that broke the camel’s back.”
In Texas, estate attorney Virginia Hammerle of the Hammerle Finley Law Firm in Lewisville reports an influx of snowbird clients wanting to move their tax residences from California and the East Coast. “This has become a very hot topic,” Ms. Hammerle says. “I’ve had clients who tell me they realize savings of $50,000 to $100,000 annually.”
Leaving state income taxes behind can be more complicated than it might seem. States all have their own rules about what makes someone a resident subject to their taxes. For example, if you run a business in New York, or your minor children go to school there, the state can rule that you’re a New York resident for tax purposes, even if you live most of the time in another state. In some cases, the question of tax residency can come down to seemingly minor issues like where you keep your pet or your wedding pictures—indicators of which house is truly your home.
States with income taxes don’t want to lose that revenue, and will investigate to make sure people who have stopped paying state income tax have done so legitimately.
“New York is very aggressive with residency audits. They can collect about $200 million a year this way, so it can be quite lucrative for them,” Mr. Bernard says. “Snowbirds can get into trouble because they might go to Florida for eight months but still be considered domiciled in New York.”
Catherine Frank, executive director of the North Carolina Center for Creative Retirement, suggests one solution for people who own homes in two states: Move full time to the lower-tax state. It’s simpler than figuring out how to split time between two homes without running afoul of the higher-tax state’s rules, and it cuts down on living expenses.
“It’s always interesting to me that people do all that to save on taxes, and then they maintain two homes,” Ms. Frank says. “That’s a pretty expensive way to live.”