If you’re thinking of moving to a low-tax state to cut your tax bill, you’d better take your pet with you.
That’s one thing New York state auditors look at when assessing whether your move is legitimate, or simply in name only. The new tax law has many advantages for closely held businesses and individuals, including lowering the top marginal individual income tax rate from 39.6 to 37 percent. With the 20 percent deduction for pass-throughs, that triggers a maximum effective tax rate of 29.6 percent on qualified business income.
But the new law also limits non-business deductions on state and local taxes—a far less welcome provision in higher-tax states like New York, New Jersey, and California. As a result, businesses and individuals in high-tax states may be tempted to relocate.
If you’ve already been eyeing a move, and have no ongoing business or personal ties, by all means go ahead. But a partial move—or worse, a move in name only—can create unforeseen issues.
‘Near and Dear’ Factor
If you’re an individual mulling a move, your actions must demonstrate clear intent. Simply checking a box on a list of factors to support domicile change will not suffice. State auditors will want to see that your actions reflect a permanent move.
In assessing the legitimacy of a change, New York State looks at several primary factors. These include the size and value of the primary residence where you initially lived compared with your new home.
Auditors will review the amount of time you spend involved in New York-based businesses, versus those outside the state. Equally significant is the time you personally spend in-state.
Auditors also consider the location of individuals and items of sentimental value to you—the “near and dear” factor, as it’s called. This means they’ll review the current location of your family, treasured mementos, and even pets. Auditors see pets’ location as a significant indicator of domicile change.
If such factors prove inconclusive or that there is reason to conclude an individual is domiciled in New York, auditors will look at a secondary layer. These factors include where you’re registered to vote and drive, where you receive your mail, and whether your new address is reflected in legal documents like your will.
You can’t easily pretend. Either you’ve changed your domicile to a different state, or you haven’t.
Relocating Your Business
Businesses also face multiple considerations.
If your business is treated as a C corporation, your profit may be apportioned outside the state. If the business is treated as a corporation —and you live in New York State, but half your property or employees are located in, say, North Carolina—you pay New York state tax on your entire profits. Yet you also must pay taxes to North Carolina.
Such scenarios may not benefit from a C corporation switch to pass through treatment, given the double tax at the corporate level and on profits distributed to shareholders. So what factors warrant a business move?
If you’re starting operations from the ground up, and a state or locality offers tax incentives such as income, property, or sales tax relief, a move may be in order. That’s also true if the state has a good talent pool—an especially important factor in cases where employees don’t want to relocate.
The last thing a business or individual wants is an audit.
Let’s say you stop filing a New York tax return, and the state audits you. If the state successfully challenges you on your residency issue and you lose or settle, you’ll have to remit whatever taxes you owe with interest and possibly additional penalties. Depending on your income, that sum could be substantial. To the extent you have relocated to a no-tax state, there may be no offset option for non-resident credits for taxes paid to New York, either.
Defending yourself or your business can be time-consuming and costly, with accounting and legal fees.
Also, keep in mind: The value of homes may rise in low-tax jurisdictions, due to an influx of people seeking a lower tax rate just like you are. Conversely, in high-tax states, the $10,000 cap on non-business state and local tax deductions could drive down home prices, because people have less incentive to own without a tax break. Though it favors the low-tax state, the home-value issue is subject to change.
Check with a Professional
Relocation requires careful analysis and comprehensive planning.
Simply moving to minimize your tax burden is like fitting a round peg into square hole. Your personal and business life may not fit that scenario.
If you’re starting a business, however—and the talent pool and tax breaks are more attractive elsewhere—a move may be warranted. The same holds true if you have long dreamed of uprooting to, say, Florida.
Before making any big change, though, it’s wise to share your plans with a tax professional. Together you can consider all the options for the wisest choice, whether it’s staying put or moving to the Sunshine State with your pet and family mementos in tow.