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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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SF Biz Times | Seeking to escape California taxes in the Bay Area exodus? There's an app for that

San Francisco Business Times | Residential Real Estate | Mar 12, 2019, 5:45pm EDT

High-tax states are becoming more aggressive in conducting residency audits on taxpayers that they feel should be paying into state coffers but claim to live elsewhere.

That’s created a level of concern, some might say paranoia, among Bay Area accountants, lawyers and wealth advisers eager to ensure their clients take the proper steps so that their move to a no- or low-tax state is seen as a legitimate relocation by the California Franchise Tax Board. 

States look at where a taxpayer works and how much time that person spends in a state as well as use what some call the “teddy bear test." That test essentially assesses where the taxpayer’s valuable artwork, family heirlooms and, increasingly, pets are located.

Now an app is profiting off the exodus. The Monaeo personal edition app grew the number of paid subscribers 51 percent in 2018 over 2017. The app charges $79 a month to help taxpayers prepare for residency audits by tracking where users are at any given time. Users can also create alerts that warn them when they’re approaching the 183-day threshold that triggers full-time residency in a state.

The spike in paid subscribers came after high-income taxpayers in California and other high-tax states began to realize that the new federal tax law likely meant higher tax bills for them and others, given the $10,000 cap on the deduction for state and local taxes paid. 

It’s easy for a taxpayer to risk a costly misstep. One Bay Area accountant said a client who recently moved to Florida was eager to return to Marin County for a few months after experiencing his first Florida summer. (Bay Area residents can get a taste of a Florida summer by stepping into a steam room.) The accountant advised his client to find another state in which to spend his summers.

One Bay Area trust attorney has long warned clients that California and other states, as well as the federal government, will be looking under rocks for possible tax revenue. That warning was echoed this month by Warren Buffett in discussing the “disaster” of public pensions contributing to the Bay Area exodus

Monaeo’s growth for its personal edition in 2019 is already outpacing last year’s level, said Monaeo co-founder Anupam Singhal, who created the app with Nishant Mittal. Singhal saw the opportunity for Monaeo after being personally targeted with residency audits in several jurisdictions. At the time, he was a principal at private equity firm Silver Lake Partners. He worked in London but traveled frequently.

Singhal anticipates another wave of growth coming from next month’s tax-filing deadline.

“People are seeing their tax bills and asking, ‘Oh my God, what am I doing living here?’” Singhal told the San Francisco Business Times, adding that he recently spoke with an accounting firm executive who is moving from California to Washington state, which has no individual income tax.

At $79 a month, the Monaeo personal edition app could be a bargain for those concerned about residency audits, given the high cost of losing a residency audit in terms of taxes, interest and penalties along with hefty legal and accounting bills. Traditionally, taxpayers rely on paper receipts, diaries and calendars to defend themselves against residency audits.

New York state, for instance, collected about $1 billion in residency audits between 2013 and 2017, with an average of $144,270 collected in residency audits between 2015 and 2017, according to figures from the New York State Department of Taxation and Finance. States are turning to IBM (NYSE: IBM) and others to conduct sophisticated data mining on taxpayers who could be rich targets for residency audits.

The California Franchise Tax Board did not have comparable figures immediately available on the success of its residency audits.

“States can either raise taxes or they can collect the taxes already owed by becoming more aggressive in their collections,” Singhal said on his way to San Diego, where he’ll be pitching Monaeo’s services for companies that need to track where employees are working, since it’s a key factor in determining payroll and other taxes owed and to whom.

See original article in San Francisco Business Times at bizjournals.com/sanfrancisco/news/2019/03/12/bay-area-exodus-california-taxes-monaeo-tax-law

Mark Calvey
Mark Calvey
Mark Calvey is the banking and finance reporter for the San Francisco Business Times. Views are my own.

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