Several states have proposed—and some have passed—wealth taxes to raise state revenues by applying a tax on the assets of those who have earned, inherited, or otherwise accumulated significant sums of money or investments. While California’s proposed Wealth and Exit Tax—Assembly Bill 259 (AB 259) that we examined in August is unlikely to ever pass as it is written, it’s important to examine the ramifications of how any version of it could impact California residents.
California’s AB 259 reaches well beyond the norm—intending to tax the worldwide net worth of residents even after they move out of the state.
There are plenty of challenges to the wealth tax concept, but it continues to attract legislators looking for ways to tap into the coffers of high-net-worth individuals.
Below, we’re addressing considerations if moving states becomes part of your tax minimization strategy—regardless of which income bracket you fall into.
California Wealth Tax Case Study
Filing and Payment Requirements
California’s AB 259 proposal would add an annual excise tax that is split into two tax brackets. Those with a worldwide net worth from $50 million to $1 billion would be charged a 1% excise tax that would be due at the same time as California annual income taxes, typically April 15th of each year. When the worldwide net worth of an individual exceeds $1 billion, an additional .5% surtax would be imposed.
The Franchise Tax Board in California would establish a Wealth Tax Advisory Council and adjust the tax forms of all taxpayers to comply with the Act. The updated tax returns would require every taxpayer filing a California tax return to either declare that their worldwide net worth is less than $50 million, or report their worldwide net worth in excruciating detail.
Reporting and Valuation
Under California’s definition in AB 259, worldwide net worth would not include any real property or tangible personal property directly held by the taxpayer, but would include all out-of-state real and tangible personal property held indirectly such as through a corporation, partnership, limited liability company, trust, or any similar legal form. Dependent and other related-party transfers—whether through donation or with consideration—must also be evaluated for inclusion.
California’s Franchise Tax Board would publicly post an economy-wide normal rate of return for the prior ten years and for each business entity, the taxpayer would annually report:
- The percentage of the business entity owned by the taxpayer
- The book value of the business entity owned by the taxpayer
- The book profits of the business entity in the tax year according to GAAP (Generally Accepted Accounting Principles)
The Wealth Act lists 18 categories of assets that must be included in the reporting. Determining the year-end valuations of put and call options, futures contracts and future ownership rights, and the subjective nature of art and collectibles would be particularly problematic. The natural fluctuations of options and futures could dramatically swing in either direction between December 31st and the tax filing date. Certified appraisals, the use of alternative minimum valuation rules, and other provisions outlined in AB 259 offer taxpayers little solace or simplification.
Millionaire Migration
Whether as a pre-emptive tactic due to the potential passage of a wealth tax or simply feeling that life would be better elsewhere, millionaires, billionaires, and others may consider moving to another state. Moving due to an excise or income tax alone may seem unlikely, but it could be the impetus that begins to push someone in that direction.
Where Should I Move To?
Determining which state to move to should include personal preferences as well as financial considerations. States that are more favorable in one aspect could have something equally as distasteful that offsets it. For some, the climate, family ties, vacation experiences, and political leanings could each tilt the scale to varying degrees while other individuals may be dispassionate about all of those factors and choose to take a more pragmatic approach in deciding where to move to.
If income or excise taxes are your top concern, moving to one of the nine states without income taxes may be attractive. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming fill the bill here. It’s interesting to note that Nevada and Washington both also appeared on the list of states that filed wealth tax proposals along with California on January 19, 2023.
When states don’t derive a majority or significant amount of their funding from income taxes, other taxes or assessments must make up the difference in order for the state to be self-sustaining. Property taxes often lead this list of alternative funding sources. The cost-of-living, local economic conditions, job market, and housing availability should also be considered, particularly if you will also be moving your business operations there.
Severing Ties
Removing your tax liability from your current state isn’t as simple as opening a mail box and getting a driver’s license in a new state as Reddit commenters often suggest. On the surface, moving to a new state usually includes leasing an apartment or buying a home, opening local bank accounts, enrolling children in schools, as well as getting that driver’s license changed (it’s required to be done immediately when moving to Arizona, Minnesota, New York, and Vermont).
Those steps may be deemed sufficient by your new state for them to begin taxing you, but if the state you leave behind is a stickler, it’s best not to let anything be ambiguous. Closing all bank accounts, selling and removing your name from all titles, closing all California Business Entities, and filing a nonresident tax form in the transition year and any subsequent year that you maintain ties would be needed. If California still comes across your name and believes you may owe them money, they can perform a residency audit at ANY time.
Guidance You Can Trust
Every state maintains their own tax structure and there is no one-size-fits-all tax solution. The REDW State and Local Tax (SALT) experts can help to address your tax needs. From assessing your current tax position to determining tax consequences of moving states, we can help ensure that you minimize your tax burden while remaining in compliance with Federal, State, and local authorities. Reach out today for an initial consultation.
