Federal tax cuts signed into law in late 2017 brought sweeping changes that capped deductions at $10,000 for all state, local, property and sales taxes (SALT) – combined. This has caused many Americans to look into establishing their primary legal residence in no-income-tax states, driving a noticeable migration pattern.
As managing member of a luxury South Florida real estate developer in the Boca Raton area, I’ve observed a great deal of interest in local real estate from prospects in northern states who are relocating or interested in establishing second home in Florida. Many of these individuals discuss their tax situation with us, mentioning it as one of the factors pushing them to make the move.
It’s not just for the weather.
From business leaders to hedge funders to pro athletes and CEOs, wealthy influencers are fueling their investments with a view to the future. For South Florida counties, this can only stimulate additional movement. According to data I analyzed from the U.S. Census Bureau, the population of Florida grew by 566,476 last year. More than 63,000 New Yorkers left for Florida, and over 450,000 residents moved out of New York, a notably high-tax state altogether.
The millionaire high state tax exodus, also known as “tax-odus,” is just beginning. Here are four reasons why.
1. Feeling The Tax Bill
While we’ve known about the tax reform for 21 months, taxpayers actually “felt” the impact of it for the first time on their 2018 federal tax returns when the real amounts were revealed. Tax strategies take time to develop, and as the full effect of the new tax rules sink in, we’re sure to see an even greater degree of tax migration in coming years.
Individuals should learn about how taxes and lifestyle costs might be reduced by changing residence. Ask your tax professional to examine your 2018 federal and state returns and compare total taxes paid to a scenario in which your primary residence is in a no-state-income-tax state like Florida.
2. The Tax Deficit Spiral
High-tax states require substantial taxes paid by the wealthy to support state government. If those taxpayers leave, it can lead to a dangerous downward spiral, with the process feeding upon itself. States losing high net worth individuals will inevitably be forced to raise taxes on the remaining wealthy, once again. This can create a destructive force as taxes climb even higher in those states. While major states such as New York may overcome this phenomenon (there are still enough reasons to continue living in The Big Apple), states such as Connecticut are already suffering a slumping housing market.
Northern states have a constant need to replenish their coffers, and look to pass additional taxes as high-earners seek refuge in lower-income-tax states. A good example of this is the new mansion tax in New York City. This progressive tax, effective July 1, 2019, is putting buyers of properties priced from $1 million upward on the hook to pay a substantial one-time fee, ranging from 1% to 4.15%, on $1–$25 million home purchases.
3. Financial Firms Are Also Moving; Flexible Employment Is Contributing
The tax exodus is not just attracting wealthy homeowners; an increasing number of financial firms are following, as well. Hedge funds, private equity firms and wealth management offices are leaving the Northeast to follow clients heading to affluent enclaves in Palm Beach and other South Florida counties.
Work flexibility is playing a big role in these demographic changes. In a constantly evolving high-tech environment and increasingly globalized world, more highly paid employees and top executives are realizing they can work from virtually any location with an internet connection.
If you determine you can keep your current job or business and continue to work remotely once you relocate — while saving $10,000 or more annually in state and local taxes — it’s time to investigate your options and start planning. The future of the work world is rapidly evolving; take advantage of it.
4. Disallowed State Workarounds
Higher-tax states, like New York, have looked into various workarounds intended to limit the impact of the Tax Cuts and Jobs Act of 2017 and stem potential revenue loss from what appears to be a serious relocation trend.
What’s a state workaround? After the IRS $10,000 deduction cap was enacted, the hardest-hit states began to adopt laws that would allow income tax credits for contributions to funds controlled by the particular state and local government, in an attempt to get around the limit by creating payments that could potentially be considered charitable contribution deductions under federal law.
However, the Treasury Department officially quashed one of the more popular options, issuing final regulations in late June 2019 that effectively prohibit high-tax states from utilizing such workarounds to evade the new cap. Disallowance of several state workarounds should stymie further state attempts to halt outmigration.
Most recently, we’ve learned of another high-earning lifelong New Yorker declaring himself a Florida resident — President Trump. As Judge Learned Hand wrote in regards to the 1934 case of Helvering v. Gregory, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Today’s technology, the internet and a nearby airport give us the ability to work virtually and remain connected to anywhere from practically any location. If your position permits, it may make great sense to consider a southward move that lets you shape your surroundings and finances to your preference.