A provision within the Tax Cuts and Jobs Act (TCJA) limited the State and Local Tax (SALT) deduction. This limit had a disproportionate impact on high tax states like California and New York. As a result, tax professionals expect residents in these high tax states to consider moving to other, lower tax states.
Will Californian’s really leave to save on tax bills?
The numbers support the concern. It is not uncommon for Californians to realize savings of $50,000 to $100,000 annually when moving to a no-income tax state. A recent piece in The Wall Street Journal provides a more concrete example. It plugs in the numbers for a couple from California with a taxable income of $500,000. Based on tax calculations for this year, the couple would save $46,000 if they moved to a no-income tax state. The savings grow as the income increases.
Where would Californian’s go?
Neighboring Nevada is a common destination. California residents have used it as a tax haven for years and tax planners report a spike in moves for tax reasons after the TCJA went into effect. Texas has also seen a surge in California transplants.
It is important to note those who are considering a similar move are wise to do so carefully. Tax laws are complicated, and if the move is not done wisely the taxpayer can find themselves the subject of dual taxation. A couple out of Connecticut is currently suing the state of New York for claiming they are “statutory residents” subject to taxation even though their primary residence is in New York.
Taxpayers can mitigate the risk of similar surprises by discussing tax planning strategies with a professional.