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Considering a Move from a High-Income Tax State? What You Need to Know Before You Go

High-earners residing in states such as California, New York, and Minnesota, known for their high income taxes, will often consider the option of relocating in order to save money. Certain p...
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CNBC | Tax collectors chase rich New Yorkers moving to low-tax states. Auditors inspect cell records, even your dog’s vet bills

CNBC | WEALTH | FRI, MAR 8 20197:05 AM EST

The cat-and-mouse game between state tax collectors and wealthy New Yorkers who are moving to Florida has reached new levels — and gone high tech.

New federal tax laws limiting the deduction of state and local income taxes have created incentives for wealthy New Yorkers to move to Florida or other lower-tax states. New York Gov. Andrew Cuomo last month blamed wealth flight for the state’s $2.3 billion revenue shortfall in December and January.


“Tax the rich, tax the rich, tax the rich,” he said. “We did. Now, God forbid, the rich leave.”

But the New York State Department of Taxation and Finance is making sure that high earners who try to leave don’t escape without an audit and a bill. New York conducted about 3,000 “nonresidency” audits a year between 2010 and 2017, collecting around $1 billion, according to Monaeo, a company that sells an app for tracking and proving tax residency.

Chance of audit: 100 percent

More than half of those who were audited lost their cases, and the average collected by New York State between 2015 and 2017 was $144,270 per audit, Monaeo said. In addition to the traditional audit methods the state uses to make sure a taxpayer isn’t gaming the system — like checking taxpayer’s credit card bills and travel schedules — New York officials are using a whole new set of high-tech tools, including tracking cellphone records, social media feeds, and veterinary and dentist records. Auditors are even conducting in-home inspections to look inside taxpayers’ refrigerators.

“If you’re a high earner in New York and you move to Florida, your chances of a residency audit are 100 percent,” said Barry Horowitz, a partner at the WithumSmith+Brown accounting firm. “New York has always been aggressive. But it’s getting worse.”

Mark Klein, chairman of Hodgson Russ tax attorneys, said his office is now working on about 200 tax-residency audits and the number is growing as more wealthy New Yorkers head for the exits.


“We’re seeing a huge uptick in our practice,” Klein said. “I’m seeing dozens of extremely high-income individuals actually leaving New York.”

Fake moves

New York’s tax department declined to comment on its specific audit strategies or numbers. A spokesman said “ensuring taxpayers pay their fair share is a top priority. Our nonresident audit program continues to be very active.”

Yet tax advisers and lawyers to the wealthy say the state is going to ever-greater lengths to ensure that tax migrants aren’t faking a move to Florida to avoid taxes. The stakes are high: The combined New York City and state taxes now are 12.7 percent, while Florida has no income tax or estate tax. The new federal tax law limits deductions for state and local taxes (known as SALT) to $10,000, making it even more costly for high-earners in high-tax states like New York.

At the same time, New York can’t afford to lose many millionaires or billionaires. The top 1 percent of earners pays 46 percent of the state’s income taxes, and Cuomo said that “even if a small number of taxpayers leave, it has a dramatic effect on this tax space.”

Stories of the wealthy counting the number of days they spend in New York and Florida to make sure they comply with the residency rules have been a staple of the New York and Palm Beach social circuit for decades. Conventional wisdom holds that if you’re out of New York State for 183 days, you don’t have to pay state taxes. But tax advisers say that while the number of days matter, the real test for auditors is “domicile” — being able to prove that a taxpayer’s permanent, primary home is in Florida rather than New York. The domicile test has become increasingly complicated as today’s migratory rich maintain four or five homes, and rarely spend much time in any one place.

Where the heart is

“It’s about proving where you really live, where your heart is,” Horowitz of WithumSmith+Brown said. “You have to show you’ve truly cut ties to New York, and that the things that are most near and dear to you are in Florida.”

Auditors now check to make sure a taxpayer’s home in New York is smaller and less expensive than his or her home in Florida. Tax collectors want to see if a taxpayer’s prized artwork, wedding albums, family photos, safe-deposit box, and most cherished jewelry are also in Florida. Having a wealth manager in Florida and a country club membership there is also a must. Also, if a taxpayer’s dentist is in New York, rather than Florida, that’s a red flag for auditors.

“It’s one thing to seek specialized medical treatment at a New York hospital, ” Klein said. “But auditors know that most people don’t travel to another state for their dentist.”

The family dog

Another big audit test: dogs. Klein of Hodgson Russ and others recommend that clients keep their dogs in Florida, and hire veterinarians there. “Pets are considered part of your family,” Klein said. “So if you want to lose a case very quickly, kennel your dog in New York when you travel.”

Auditors have even been known to visit people’s pied-a-terres in New York to check refrigerators and dresser drawers to make sure taxpayers don’t reside there full-time anymore.

“I had one audit where the agent opened the refrigerator and the stuff had been sitting there for a year and a half,” Horowitz said. “We won the case.”

But New York has a new arsenal of high-tech weapons to use in its residency audits. Tax experts say the state now can retrieve a taxpayer’s cellphone records to check the location of all the calls they make and receive. Auditors have also checked people’s social media feeds to make sure they are being truthful about their location.

Taxpayers, in turn, are using their own high-tech tools. Moneao calls itself a “personal and audit defense system” and sells an app and web interface that allows users to easily track and log their days in and out of a state to make sure they don’t exceed the limit. Monaeo said use of its “Personal Edition” app is up 51 percent in 2018 over 2017.

Domicile is subjective

Because defining “domicile” is subjective, New York ends up winning more than half of its tax residency audits, meaning it collects the state income taxes for the year. The state can also keep coming back for more — tax lawyers say it’s not uncommon for clients to be audited for two or three years in a row. Some audits can drag on for five years or more. Taxpayers can appeal their audit result, but most end up settling, according to accountants and lawyers.

The real goal for the wealthy who move out of New York, however, is to escape its estate tax, which is 16 percent on estates above $5.5 million. For a New Yorker worth $100 million, being forced to pay a year or two of state income taxes after an audit is worth it to avoid the estate tax.

“We call it the golden ticket,” Klein said. “The goal of a residency audit is to get the golden ticket of written confirmation from New York that you are no longer a resident. We have seen some auditors who say, ‘Look, this is an ambiguous case, but if you come up with X dollars, then we can see the change of domicile.’”

See original article on CNBC at cnbc.com/2019/03/08/tax-collectors-chase-rich-new-yorkers-moving-to-low-tax-states

Robert Frank
Robert Frank
CNBC Wealth Reporter, Best-selling author of “Richistan.”

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