A friend recently shared with me the reasons why he moved his family from New York City to suburban Connecticut. He had lived in New York City for many years and paid significant sums of money in state and local taxes – – significant, he emphasized – – and when his daughter was medically diagnosed to need educational accommodations, her needs fell on the deaf ears of the local school system. The family moved to a big house in Connecticut, where the taxes were significantly lower and the school there was not only receptive, but eager to help them.
Another friend moved to Florida, and plans on selling his business in a year or two, in order to avoid state income taxes on that sale. Florida will not tax that sale. His former state, New Jersey, a high tax state, would. There is nothing immoral or illegal about taking such steps to lower one’s tax liabilities. As Justice George Sutherland of the United States Supreme Court wrote: “[T]he legal right of a taxpayer to decrease the amount of . . . what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be avoided.” Gregory v. Helvering, 293 U.S. 465 (1935). FN 1.
The exodus from high tax states like New York and New Jersey increased in 2018 and 2019, after the tax law changed and the federal deduction for state income taxes was capped at a measly $10,000. This cap had a significant negative impact on taxpayers in high-tax states, and the removal of this long-standing deduction caused many people to leave.
Even Donald Trump, it was reported this week, filed a “declaration of domicile” in Florida, purporting that he moved from New York, presumably for tax reasons.
It is likely that all three of the people above may face an audit from the high-tax states from which they moved. Whether the reason for a move is to find greener pastures, to benefit one’s family, or to lower one’s taxes, the former state will not look favorably on the loss of tax revenue. New York City and New York State are particularly aggressive in auditing the tax returns of people who claim to have moved to a different state. In an audit, it will be up to the taxpayer to prove that he or she no longer has a tax nexus to the former state. Simply buying property in a new state is not enough. There are a multitude of factors that are used to establish tax residency. In a 2018 lawsuit, a taxpayer was found to still have a New York domicile even though the taxpayer spent more than 183 days at his condo in Florida.
Our attorneys understand the tax laws and residency requirements. We can assist you before the move, in implementing a plan ahead of time to support your new residency and break from your high tax state. We can also defend you in an audit from the state that is challenging your new residency and seeks to continue to tax you.
Contact us for more information.
 See also: Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947): “Over and over again, courts have said that there is nothing sinister in arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions” (dissenting opinion, Judge Billings Learned Hand).