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| Best Practices: Taxes |
Tax Americana
Daniel Gross
09/01/2004
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As with most issues involving tax codes, it is not quite that simple. In
fact, the process is fraught with complications. “It has to be an actual change,
and it has to occur prior to the income being earned,” instructs Art Rosen, a
partner at the New York law firm of McDermott Will & Emery. As a rule of
thumb, individuals who spend more than 183 days in a state are more likely to be
considered residents. But such status is not automatic, and the judgment can
frequently be subjective. “There’s a relative weighing of factors that goes into
it,” says Douglas Joseph of the accounting firm Blum Shapiro, based in West
Hartford, Conn. People who wish to change their domicile can also do many things
that prove residency: register to vote, obtain a new driver’s license, redraft a
will or join a country club in their new home state.
TOP VIEW
States such as Florida, Nevada and Wyoming rely on tax incentives, such as no
personal income tax, to retain us as residents. However, there can also be a
range of state taxes that are less overt: taxes on dividends and interest,
intangible property and estates. For those of us with multiple residencies,
sorting out these tax implications can have long-lasting financial consequences. |
However, because states
hate to see large sources of tax revenue leaving, they frequently subject
relocation attempts to strict scrutiny. “I can almost guarantee that high-income
taxpayers are going to be audited for residency,” cautions Di Re. State auditors
are likely to examine everything from cell phone bills and voter registration to
country club memberships and religious affiliations. Because the judgment is
made on a subjective basis—there is no set of specific steps states publish that
individuals can follow—it is important both to keep records that prove time
spent in a state, and to ensure that we are not claiming residency in one state
while spending most of our time—seeing all our doctors and serving on boards of
nonprofit organizations—in another.
For those of us who are not tied down to
a state for business or personal reasons, options are expanding. Two-thirds of
the members of the PGA Tour live in Florida. “It’s partly the weather, but it’s
also because of the tax situation,” notes Wilder. Lederman has pinpointed
rapidly growing Nevada, which generally lacks the less overt taxes that some
no-income-tax states have, as a more attractive destination. “Nevada is becoming
more popular. It doesn’t have the income tax. And it’s similar to Florida in the
sense that it won’t have an estate tax, and its property taxes tend to be pretty
low,” she says.
Municipal Advantage
We can expect even more new tax
wrinkles as states bid to play host to the wealthy. In an effort to encourage
venture capital investing in a state better known for producing grains than
capital gains, Kansas this year enacted an Angel Investor Tax Credit. The tax
applies to investors who meet the Securities and Exchange Commission’s
accreditation standards: individuals with more than $1 million in assets, or
trusts with assets of more than $5 million. Accredited individuals who make cash
investments in Kansas businesses that are fewer than five years old and have
annual revenues of less than $5 million receive a credit against state taxes
equal to half the investment.
| California, Florida and Nevada now have constitutional prohibitions
against an independent state estate tax. |
In the past few years, some states have
targeted wealthy residents as potential sources of state revenue. New Jersey,
for example, is considering raising its income taxes, on individuals with more
than $500,000 in taxable income, from 6.37 percent to 9 percent. But other
states recognize that they can gain benefits by not taxing affluent individuals.
“Wyoming is benefiting from the people of affluence who are retiring and
building second homes here. It is part of the [state’s] economic development
strategy,” says Ben Avery, portfolio manager at the Wyoming Business Council,
the state’s economic development agency.
Wyoming also allows residents to
receive full tax benefits when they buy municipal bonds from any state—offering
investors wider choices. “You can pick and choose the kind of bonds you want
from among 50 states, and I find that to be a tremendous advantage,” Riley
boasts. In many other states, in order to get the full benefit of municipal
bonds—whose interest can be exempt from federal, state and local taxes—residents
must buy securities issued by their state of residence.
Since Riley has taken
up residence in Wyoming, he has practically become the poster child for the
Wyoming Business Council. He has started four Boys and Girls and Teen Clubs, and
donated $1 million for the construction of a large hockey rink, the Victor Riley
Arena, which doubles as a convention center. He is also a member of the Buffalo
Bill Historical Center board of trustees and has joined the Northwest College
board of trustees. The benefits he brings the state arguably outweigh any tax
revenue it forgoes.
Illustration by Illo Credit.
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