Quick, don’t move!
Seriously, stay right where you are—that is, if you live in a high-tax state.
Right now, you may be wondering what the heck we’re talking about right now, so let us take a brief moment to explain.
In 2019, thousands of residents of high-tax states like California, New York, New Jersey, Connecticut, and Ohio have been packing up and moving to greener—or, rather, lower taxed—pastures.
Where are they headed? Well, quite a few of them have settled in states like Florida and Texas, warm locales that just so happen to have zero personal income tax.
Were you one of them? Or were you considering a move from your high-tax state to a low or no-tax state?
If so, you may want to plan your relocation very carefully before calling the movers. Because those high-tax states have been cracking down on residents who have been packing up and moving to lower their tax obligations.
Why is 2019 any different? What’s so special about this year that has turned it into a taxpayer exodus? And what does any of this mean for you?
That’s exactly what we’re here to answer.
Whether or not you’re considering a move based on your state’s income tax, there are lessons every taxpayer can take away. We’ll dive into what, exactly, brought about this move-en-masse, what measures states like New York and New Jersey are taking against fleeing taxpayers, and what you should keep in mind—moving or staying put.
Our story begins with the Tax Cuts and Jobs Act of 2017.
Remember that thing? Well, it was a piece of controversial (as everything in Washington, D.C. seems to be) legislation that served as one of the largest tax overhauls in U.S. history.
Though it made countless changes to federal tax code, one notable aspect of the bill was that it streamlined several elements of the tax filing process, including placing a $10,000 cap on deductions for state and local taxes.
Here’s why that was controversial:
Normally, you can deduct your state and local taxes against your federal taxes—so if you’ve paid $300 to your state, you can more or less get that $300 back when it’s time to file your federal tax return. However, a $10,000 cap makes it impossible for a high earner who pays $140,000 in state taxes to fully deduct their state taxes. That $130,000 is left on the table (with the IRS).
Although experts were split on the impacts of this portion of the bill, many people, including officials from states with high income tax rates, were worried this would drive away people who pay quite a bit in state taxes. After all, a high income tax rate might not look so bad when you can deduct it from your federal taxes. When that’s no longer on the table and your tax obligation goes up, who knows?
This year was a big test for the new tax law, because it was the first year the new rules really took effect. A lot of taxpayers were surprised by how the new bill worked in practice—to the advantage of some and disadvantage of others.
But there have been some moves, and experts are expecting more—as high earners who may have more financial leeway to move now in order to reap the future tax benefits decide to do just that.
The last thing some of these states want is to lose out on hefty tax revenue from some of their wealthiest citizens, so they’ve grown stricter when it comes to high-income taxpayers jumping ship.
You pay taxes where you live.
But where is that? What if you live in one place nine months a year but you vacation elsewhere for the remaining three?
This is the biggest barrier to exit for taxpayers trying to leave their high-tax states, and states like California and Ohio, and cities like New York City have proven incredibly shrewd with what is required to establish a new residence elsewhere.
Many extremely wealthy taxpayers may already have a second home, so they don’t necessarily need to break out the cardboard boxes and tape. It’s more about establishing that residence as their primary domicile, not just a second home or vacation house.
But, they’ll need to be prepared to prove it.
If you’re planning making the transition from your current home in a high-tax state to a home in a low-tax state, here is what you should keep in mind.
Obviously, a $10,000 cap won’t apply to a majority of taxpayers. Nonetheless, there are still a few takeaways you might benefit from.
Living Comfortably (Wherever That May Be)
Hopefully, now you have a better idea of the taxpayer exodus of 2019. You may or may not find yourself considering a move from a high-tax state to a low-tax state, but that shouldn’t stop you from learning about the tax laws that impact you and your fellow taxpayers every day.
Knowledge is what puts you in the drivers seat to a better financial future. Now, enjoy the ride.