March 18, 2013

States crack down on top earners who flee as taxes rise

Families who look to move to a state with no income levies face years of scrutiny as local governments search for revenue.


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Golf champion Phil Mickelson drew attention in January after saying he would make some "drastic changes" because of higher taxes. Voters in California, where he lives, approved an increase in the top state income tax rate to 13.3 percent from 10.3 percent.

2013 File Photo/The Associated Press

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Hedge fund manager John Paulson stirred speculation last week when Bloomberg News reported that he was exploring a move from New York to Puerto Rico, where new residents pay no local or U.S. federal taxes on capital gains. Paulson said Friday he won't set up a permanent residence on the island.

2008 File Photo/The Associated Press

Federal law prohibits states from taxing certain retirement income of non-residents such as distributions from 401(k) and individual retirement accounts. Other equity-based compensation including restricted stock units or stock options don't have those limitations, said Griffith.

"States are starting to look at how they can tax that money," if it was earned while people were working within their borders, she said. "States are getting aggressive across the board. Anywhere they think they can get money, they're going to grab it."

Revenue departments in states also have gotten better at using technology to tap information in Internal Revenue Service databases as well as credit reports to E-Z Pass records to track down former residents, Griffith said.

Audits done by the Massachusetts Department of Revenue more than doubled in 2012 to 45,887 from the prior year with assessments on taxpayers totaling $79 million, according to the state's bureau of desk audits. The jump was largely due to automated programs, spokeswoman Ann Dufresne said.

New York state's tax department uses tools for audits including analytics, third-party data and IRS referrals, spokesman Geoffrey Gloak said. "The department uses its business analytics to review every return and identify those that have the greatest likelihood of compliance issues," he said.

In Minnesota, Dayton proposed a snowbird tax to require those in the state more than 60 days – rather than 183 – to file a return.

"He feels that if individuals live in the state for part of the year, they should help pay for the services that they enjoy," spokeswoman Katharine Tinucci said in an email.

Sloan gives high-net-worth clients who move a checklist of actions such as obtaining a new driver's license, canceling memberships to local organizations in the prior state and transferring investments so they are based in the new locale.

"You have to change your life," Sloan said. "You can't just say, 'I'm spending 183 days here and not 183 days there.' "

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