Not So Fast, Mr. Trump! Relocating to a Low-Tax State Is Hard to Do

Last week, President Donald Trump confirmed on Twitter that he’s switching his permanent residence from New York to Florida. Mr. Trump was born in New York City and lived there most of his life, and he has had a home in Palm Beach for more than three decades.

The President joins a long line of wealthy people who have left high-tax states like New York, Connecticut and California for low-tax states like Florida, Texas or Nevada. Among the latest is billionaire Carl Icahn, who has announced that he’s leaving his native New York for Florida.

The tax differences are clear. Florida, Texas and Nevada have neither income nor estate taxes, while New York and Connecticut have both. California doesn’t have an estate tax, but its top statutory income tax rate is the highest in the nation: 13.3%.

For Americans considering similar moves, and for Mr. Trump himself, tax specialists have a warning: Be careful, because states left behind can subject leavers to intrusive audits and sometimes lawsuits that drag on for years. In Kansas, a residency case involving $43 million of state tax for 2005 and 2006 from an entrepreneur who sold a company that owned Pizza Hut franchises is still unresolved.

“States are jealous of their tax dollars and aggressive in trying to keep them. The New York auditors are well trained, and they’ve seen everything,” says Louis Vlahos, an attorney with Farrell Fritz in New York who frequently advises business owners planning to move away.

In residency battles, details matter. A New York administrative judge held in 2017 that a former New Yorker didn’t owe $430,000 of tax for 2009 and 2010 because he had truly changed his home to Texas. The clincher was that he had moved his most cherished possession—his large, elderly dog—to his home in Dallas.

In general, say tax specialists, people switching states must be able to show that they have truly left one place and truly landed in another.

“I’d advise Donald Trump to bring a moving van onto Fifth Avenue and put things important to him in it, to make it clear he’s going. Then he must show that Florida is now his home,” says David Lifson, a certified public accountant with Crowe in New York who often counsels wealthy people.

He cautions that someone who leaves a state, but then moves around to a few different places, may find it hard to prove he or she has truly left the first home.

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States often have two tests for determining if someone is a taxable resident, and both matter.

One involves whether the person spent more than 183 days per year in a state where they have a home. Leavers often need to count days, and the rules defining a day can vary from state to state. Some advisers suggest making frequent credit- or debit-card purchases to provide proof.

The other test is the hazy issue of domicile—a legal term for one’s true principal home. Many factors can come into play, such as voter registration; burial plots; the location of primary doctors or even veterinarians for pets; and where holidays are spent.

State auditors often delve into these issues, for example by comparing the size and value of homes in the prior state and the new state. So if a couple’s house at the Jersey shore is more valuable than their new home in Florida, it could count against Florida domicile.

California auditors tend to check travel records, says Chris Parker, an attorney with Moss Adams in Sacramento.

“If someone claims to live in Boise but usually flies into and out of San Francisco, that could be a sign of California domicile,” he says.

Of special importance is the location of what the law calls “near and dear items,” such as heirlooms, photo albums or jewelry. Don’t just take beloved objects to the new home, say specialists. Send them and get a receipt showing their value.

Mr. Vlahos urges retired business owners moving out of state to be especially careful if they still have a role in their firm. Modern communications make it easy to contribute to a business from afar, and auditors can argue that such participation reinforces domicile in the prior state.

Based on these criteria, Messrs. Lifson and Vlahos both suspect that Mr. Trump hasn’t yet fulfilled the conditions for switching his domicile to Florida. Spokespersons for the White House and the Trump Organization didn’t respond to requests for comment.

To change his domicile to Florida, they say, Mr. Trump should consider selling any homes in New York. He should also make sure that New York auditors will agree that he has severed management ties with his New York businesses, as he said he did upon becoming president. Meanwhile, his White House residence won’t bolster his argument that he has left New York because the law sees it as a temporary move that doesn’t affect his domicile.

If Mr. Trump does actually break up with New York, he would still owe New York taxes on taxable income generated in the state, but he wouldn’t owe it on income earned outside it.

Write to Laura Saunders at [email protected]

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