Elon Musk, who says he has relocated to Texas from California, is just the latest billionaire to announce a move that could deliver big tax savings.
The mechanics of how the rich can enjoy those savings, however, are complicated and involve jumping through a few more hoops than simply announcing that they have moved from Los Angeles to Dallas, or New York to Miami. Spending a certain number of days out of the state, or changing documents like voter registration and drivers’ licenses, are unlikely to be enough.
Take, for example, California, which Musk has decried as “complacent.” About 700 auditors are employed by the state's Franchise Tax Board, according to a spokesman for the agency. For many of them, the sole job is to check on taxpayers who have claimed to have left the state. Residency audits can take years to complete, and include scrutiny of business relationships, family and community ties, and the location of prized possessions like artwork and heirlooms.
“People leaving California have to actually take the many inconvenient and costly steps to actually change residency under California law,” said Christopher Manes, an attorney specializing in the topic based in Palm Springs. “For Musk to change legal residency for tax purposes, he’d have to disentangle himself from his California contacts to the extent that the center of his life moves to Texas.”
What’s more, the state’s rules say even non-residents must pay taxes on income that come from California sources. That could include the proceeds of options earned while Musk was a resident, or profits from businesses operating in the state.
He shares joint custody of five teenage sons with his ex-wife Justine Musk, and has thousands of employees in California — which could be seen as evidence of continued strong ties to the state. He remains the chief executive officer of both Tesla Inc., headquartered in Palo Alto, and SpaceX, based in the Los Angeles area where he has lived for two decades.
Musk didn’t respond to an email seeking comment.
Going Out of State
Still, the wealthy can save millions of dollars by moving from a state like California, which levies a top rate of 13.3% on income — the highest in the nation — to states like Texas, Nevada and Florida, which have no income tax at all. They just have to convince auditors or courts that they really have left.
It’s a process that the very rich will increasingly have to contend with, as moves such as Musk’s accelerate both on the west and east coasts.
Fund manager Jeffrey Gundlach floated the idea of leaving California for a low-tax state earlier this year. The chief executive officer of Doubleline Capital criticized lawmakers in Sacramento for considering tax hikes on “job creators.” Celebrities have also moved out. This year, podcast host Joe Rogan said he was moving from Los Angeles to Texas shortly after signing a deal with Spotify Technology SA that could be worth more than $100 million.
Relocating to Florida, meanwhile, has been popular for decades, particularly for older residents of New York — which levies a top rate of 8.82%. New York City also imposes its own income tax of as much as 3.876%.
Last year, billionaire Carl Icahn moved from New York to Miami, and President Donald Trump changed his official residence from Trump Tower in Manhattan to his Mar-a-Lago resort in Palm Beach.
“We’ve seen an enormous trend of the wealthiest family offices relocating to Florida,” Christopher Boyett, the co-chair of law firm Holland & Knight’s National Private Wealth practice, said. Some financial firms seem to be following their clients by expanding or moving operations into Florida. Goldman Sachs is considering opening a new Florida hub. Hedge fund titan Paul Singer is moving the headquarters of Elliott Management Corp. to West Palm Beach from midtown Manhattan.
The potential savings of moving to states without an income tax were widened by the federal tax overhaul passed by Republicans and signed by Trump in 2017, which capped state and local tax deductions at $10,000. More recently, the Covid-19 pandemic has sent many wealthy Americans out of big cities like New York and San Francisco into second homes. Many are at least talking about making permanent moves, advisers say.
“A lot of people left,” Cindy Ostrager, the New York-based director of tax at Clarfeld Citizens Private Wealth, said of her ultrahigh net worth clients. “I have a lot of clients who say they’re not coming back.”
Ostrager said other clients still haven’t taken the steps to officially move away from New York, but they’re thinking about it and might pull the trigger in 2021.
The loss of wealthy taxpayers threatens to shrink city and state budgets. Hedge fund manager David Tepper was New Jersey's largest individual tax payer when he moved to Miami in 2015, prompting worries in the state capitol about lost revenue. He moved back to the Garden State earlier this year.
Legislators in both California and New York have proposed higher taxes on the very wealthy to help state budgets hit hard by Covid-19. In New Jersey, lawmakers actually raised taxes on the rich, to 10.75% from 8.97% on income above $1 million a year.
“We’re going to have to raise taxes at the end of the day in any event,” New York Governor Andrew Cuomo said on Wednesday. “But the question is, how much in taxes?”
Some, including Cuomo earlier this year, have warned that higher taxes on the wealthy could discourage rich residents from returning to the state after the pandemic is over.
Fear of rich people moving for tax reasons is overblown, says Carl Davis, research director at the left-leaning Institute on Taxation and Economic Policy, or ITEP. Studies show the wealthy actually move less often than other Americans.
“A billionaire can obviously afford to live wherever they want,” Davis said. “There’s no reason on Earth that they should choose where to spend their lives based on a state tax rate that will have zero impact on their standard of living.”
Though some wealthy residents end up leaving, the total number of millionaires in high-tax states has actually been rising. California had 91,560 tax filers with at least $1 million in income in 2018, twice as many as in Texas or Florida, according to an ITEP analysis released in September.
Even after the new tax law capped the deduction for state-and-local taxes at $10,000 starting in 2018, the millionaire population grew far faster in California, up 10.6% from the previous year, and New York, where it rose 7%, than it did in Texas, where it increased 4.3%, and Florida, up 2%.
As for Musk, he seems to be putting down roots in Texas, with Tesla constructing its new Gigafactory in Austin and SpaceX building its Starship spacecraft in Boca Chica, Texas. But even if he establishes that he’s left California, the Golden State may continue fueling his success.
“Tesla has benefited inordinately by being in California,” said Chris Hoene, executive director of the California Budget & Policy Center. Ironically that includes a tax perk — a state-funded rebate for electric cars that has helped make California one of Tesla’s largest markets. Even if Musk leaves the state as a taxpayer, Hoene said, “he is still benefiting enormously from the tax code in California from a company perspective.”
— With assistance by Laura Davison, and Romy Varghese
Bagikan Berita Ini
0 Response to "Elon Musk Moves to Texas: Will Tesla (TSLA) CEO Have to Pay California Taxes? - Bloomberg"
Post a Comment