for company founders This isn’t a myth for exiting shareholders — a move that can make a lot of financial sense for tax reasons.
In tech hubs like the Bay Area and New York City, the top rates are 14.4% (as of January 1, 2024) and 14.8%, respectively. In contrast, states such as Florida and Texas have no state income tax, meaning there are no capital gains taxes at the state level.
Let’s consider the numbers: On a $30 million exit, founders save about $1 million. Moving from California to Florida costs approximately $4.3 million and moving from New York City to Florida costs $4.4 million. It was a big motivator for us to be willing to take the risk and go to Miami.
However, many times things are not that simple. We all know that moving can be a difficult decision, especially for those with roots in the community. Leaving your favorite golf course, local ski hill, and your group of friends can have a serious impact on your quality of life. It can be heartbreaking to let your child leave the family, friends and school they know and love.
This is where some people may run into trouble.
What You Need to Know About Moving to Save Taxes
Paying less in taxes isn’t as simple as packing up, fleeing town, and relocating to a new address in a tax-friendly state.
As tempting as that may be, you can’t set foot in Silicon Valley while setting foot on the Gulf Coast and save on taxes at the same time. When you move to Miami, the kids may not be able to stay in private schools in Manhattan.
As tempting as that may be, you can’t set foot in Silicon Valley while setting foot on the Gulf Coast and save on taxes at the same time.
Living in both states won’t save you. When it comes to taxes, you must pay them in full at the new address, or you may owe taxes at the old address. Unfortunately, some people may not realize this until after they have invested a considerable amount of time, money, and emotional investment in it.
Each state has its own rules for determining your tax residency, and if you’re a high net worth individual or high earner, you won’t be able to fly under the radar. High-tax states like New York or California pay special attention to those in the highest tax brackets. If you stop paying taxes at the state level, the state government will likely take notice and challenge your new residency application.
In other words, your actions are likely to trigger an audit.
In particular, the California Franchise Tax Board is known to be wary of individuals attempting to terminate their California residency, so it becomes even more important to plan and document your move thoroughly.
Also, it’s important to consider the complexities of community property law, which can affect your tax exposure if you have a spouse living in California, even if you move to a lower-tax state. Proper legal and tax advice is critical to navigating these complexities and ensuring a smooth transition.
Many people mistakenly think it’s easy to split time between states and claim a more favorable tax jurisdiction. But when you can afford to travel and maintain multiple homes, that doesn’t mean you can choose where to live best for you when tax time comes. Spending just 183 days of the year outside of a high-tax state is unlikely to reduce your tax liability.
Even after leaving high-tax states like New York or California, it’s important to understand the potential tax liabilities associated with passive income sources in those states. For example, if you continue to receive passive income from a partnership, investment property, or other source in New York or California, you will need to file a nonresident tax return and pay taxes on that income in those states.
Also, having passive income sources in your previous state can increase the likelihood of a residency audit. Therefore, it’s important to carefully consider whether keeping those investments that generate state-specific income fits with your overall financial and tax planning goals.
ready to move
If you’re considering moving to a state with lower taxes, it’s crucial to plan ahead and be prepared. The more time you give yourself before the company exits, the better off you will be. We recommend that you leave high-tax states 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 critical.
