Out-of-State Residency for Individuals and Trusts

The limitation on the state and local taxes paid deduction has prompted more aggressive tax planning in states with higher taxes. Many taxpayers are hunting for opportunities to shift their income to an entity or a state with low tax rates, or are opting to transition their residency to a state with lower taxes.

Shifting income to an entity requires the following:

  • Move the business, or a portion of the business, to another state to shift income to that other state
  • Create an out-of-state trust that removes income from a high tax jurisdiction

Residency transition should be contemplated well in advance of any large income events so the plan can be properly executed. When plans are rushed, there’s increased risk the state will reach the taxpayer and claw-back the income. Even though a business is moved to another state, the state of the residency of the owner could still tax that income.

In addition, creating an out-of-state trust may be difficult if the trust is already established. Many states look to the residency of the beneficiaries. If the trust requires income to be distributed or allocated to beneficiaries, creation of an out-of-state trust may not remove it from the high tax state.

Planning Opportunities

Exploring where you want to move and why, as well as the holistic tax impacts of the proposed change, should include an immediate state and local tax planning review. You should also look ahead to the long-term implications of the move as it relates to your personal tax liability and wealth management plan.

For example, some states have a low income tax rate but may have an aggressive estate tax or transfer tax regime. Other states may have a low tax rate but aren’t attractive in the long term, which could compromise your transition strategy. The goal is to accomplish your financial goals without sacrificing your quality of life goals.

A sponsored transition has become a more popular option that includes a privately held business relocating its operations or its headquarters, including a number of high level executives. This strategy is more complex, but can yield a number of opportunities for you and your business.

More Resources

The Tax Cuts and Jobs Act has far-reaching implications for businesses and individuals that pay state income taxes. Our Insight has the details.

The Tax Cuts and Jobs Act has been described as the most sweeping change to the federal Internal Revenue Code since 1986. Learn more about the impact these federal tax changes may have on you state tax liabilities in this webcast.

Learn how technology executives who derive a significant amount of their income from stock-based compensation can benefit from proactive tax planning.

Individuals will need to consider the effects of President Trump’s tax reform in their 2017 income taxes.