2023 Marcum Year-End Tax Guide

27

THE MARCUM YEAR-END TAX GUIDE 2023

When it comes to taxation, our nation’s 50 states, cities, and localities have very different approaches and philosophies on tax collection. One state may not have any income taxes, but their real estate or sales taxes may be high. Some may apply the reverse, with high-income and lower real estate taxes, while others may be somewhere in between. THE MIGRATION OF HIGH- NET-WORTH INDIVIDUALS TO LOW-INCOME TAX JURISDICTIONS BY LOREDANA SCARLAT AND JO ANNA FELLON

The decision to reside in a particular state has generally been driven by more personal factors: family ties, personal preferences, job and career prospects, to name a few, and less so by a state’s tax regime. However, different trends have emerged over the past decade. Factors such as the diversification of the economy, increased workforce mobility, or wealth-creating monetization events for various enterprises are now driving individuals’ residency considerations. For example, if a resident of New York, where the state tax rate tops at 10.9%, expects a large payout, they may be tempted to consider relocating to a lower tax jurisdiction. The COVID-19 pandemic changed the world profoundly and shifted priorities. The scale of remote work has shifted the paradigm for many companies and individuals. If one could maintain their lifestyle, why not move to a state where the grass is greener, the sunshine brighter, and taxes – lower? However, residency break-ups are never easy, and high-income tax states dedicate a lot of human capital and financial resources to ensuring they get their share of tax.

Currently, the top five highest income tax states in the Union are California 13.3%, Hawaii 11%, New York 10.9%, New Jersey 10.75%, and Oregon 9.9%. New York State residents who are also New York City residents can add another 3.876% to their tax rate, bringing their rate to almost 15%. Now we have the answer to why New York City is the city that never sleeps. The main difference between being a resident of a certain state and a nonresident is that the first gets taxed on their worldwide income, whereas the latter is taxed only on income obtained from sources within that state. In determining residency, states apply two tests – domicile or statutory residency. DOMICILE TEST California and New York have similar approaches in this sense. According to the California Franchise Tax Board’s Residency and Sourcing Technical Manual, a domicile is “the place with which a person has the most settled and permanent connection and the place to which the individual intends to return whenever

absent. One’s acts must give clear proof of a concurrent intention to abandon the old domicile and establish a new one.” Establishing intent to remain in the new state permanently and indefinitely is an evaluation of facts and circumstances. Despite common belief, changing one’s driver’s license, registering to vote in a different state, and signing a new lease do not weigh so heavily when considering the domicile matter. In New York audit cases, for instance, the following five critical factors are analyzed: • Home – if the taxpayer maintains homes in both states, the size, value, and use of homes are compared. Or more emotionally – to which home does the taxpayer return when traveling? • Active business involvement – where the taxpayer still maintains an active business in the old state. • Time – the percentage of time spent at each location. A mere

day count would not weigh so heavily as a clear change in the patterns where the days are spent.