A “boomtown” is an area that undergoes unexpected and rapid population and economic growth, or a community that seems to spring up overnight because of a sudden influx of people.
What makes a place become a boomtown is complex. Some of the places that are currently “booming” and expected to continue to do so over the next decade are: Austin, Houston, Dallas-Fort Worth, San Antonio, Denver, Salt Lake City, Raleigh, San Jose and Seattle.
According to economists, these cities are people magnets because they are tech centers, which draw highly educated, motivated people. And they are “cities of opportunity,” where housing costs and taxes are generally lower.
But, before you consider a personal or business move to a boomtown, first understand the tax implications of any relocation.
TAX IMPACTS: RELOCATING FOR INDIVIDUALS
A major reason to relocate to a boomtown, or anywhere else for that matter, is a lower state income tax, or none at all. Florida is one such state and has benefited greatly from such “tax immigrants.” In Texas, which also has no state tax, Houston and San Antonio are leading the current boom.
But to benefit from little-or-no state income tax, you must prove “residency” to your new home state, which may not be simple. Also, depending on the state you’re currently in, you need to prove that you broke your “domicile,” and your intent is to not return.
Each state has its own method of taxing residents, and if you maintain a residence in more than one state, you need to avoid being taxed by two different states on the same income.
If you don’t sell your previous home but rent it out, you’ll likely have to file a tax return for both states. If you usually pay estimated taxes because you are self-employed, or earn a pension, or investment income, the rules for filing estimated taxes could be different in your new state.
If you move to a boomtown for a new or better job, you may be able to deduct some moving expenses. If you relocate within 39 weeks of starting a new job and have moved at least 50 miles from your former place of employment, some moving expenses may be tax deductible.
Realizing any specific tax advantages or disadvantages depends on where you relocate to, and the type of business.
TAX IMPACTS: RELOCATING YOUR BUSINESS
While business growth is a primary reason that boomtowns boom, there can be pros and cons to moving your business to one. To retain your top employees and move them with you, for example, you may have to reimburse their moving expenses. Payroll taxes would also have to be withheld to the extent such payments to employees are considered taxable income.Entities like partnerships, LLCs and corporations have different tax implications and filing requirements. Generally, when moving your corporate offices, you must do one of three things:
- Remain incorporated in your old state and register as a “foreign corporation doing business” in your new state.
- Dissolve the corporation in the old state and form a new corporation in the new state.
- Reorganize, where you form a new corporation in the state you relocate to, but absorb the old entity into it.
Factors that will determine your best option include: ongoing state taxes and fees, federal tax issues, dissolution and/or reorganization fees. These can all be complex; it is wise to discuss any tax implications with an advisor.
BOOM OR BUST?
Moving to a boomtown could be great for you or your business, but first speak with your financial professionals to make sure your “boom” does not turn out to be a “bust.”
This article was originally published in the June/July 2016 issue of Worth.