San Antonio is currently one of the fastest-growing metro areas in the nation. If you’re among our new residents, welcome! Before you enjoy the tax-friendly perks of living and running a business in Texas, you’ll need to cut tax-ties with your previous state. Some, like California and New York, make that very tricky.
Texas is renowned for its business-friendly environment and attractive tax structure, with no state income tax for individuals or corporations. Perhaps that’s one of the reasons why you moved here.
However, high-tax states are often reluctant to let go of their taxpayers, particularly high-income individuals and businesses. They may add tax obligations or attempt to continue collecting taxes even after you’ve moved, arguing that you haven’t truly established residency in Texas. This can lead to unexpected tax bills, audits, and legal complications.
In other words, you may have to fight for your (tax) independence once you arrive.
These taxes, often called ‘exit taxes,’ can present themselves in a few different ways. Forbes’ Bob Carlson points out a few here, including special rules for New Jersey real estate owners who are selling and moving out-of-state and a plethora of California rules, including a proposed wealth tax that places a 0.4% tax on the net worth of high-income individuals that could be enforced for up to 10 years after leaving the state.
More commonly, though, like in New York and California, the issue is that they will want to continue to charge state income tax until you can prove to them that you have entirely cut ties.
Therefore, with so many discrepancies between states (and even some cities!), your first move should be to understand the tax complications accompanying your unique move. What you want to do is to officially establish what taxing entities call a change of domicile. At the very least, you should:
- Notify your former state and tax authorities about your move immediately. This could sometimes include filing a final, part-year resident tax return.
- Obtain proof of residency in Texas by obtaining a Texas driver’s license, registering your car in the state, registering to vote, and officially updating your mailing address for bank statements and bills.
- For business owners: Register your business, update licenses and permits, inform clients and vendors, and close out any unnecessary business in the former state.
For states that scrutinize your move, you can expect any connections you have with your former state to potentially be used as proof that you’re not “out” yet. Some factors that could be considered:
- Maintaining a residence in the former state.
- Frequent or prolonged visits back to the former state.
- Continuing to use doctors or financial advisors in the former state.
- Keeping active memberships in clubs or organizations in the former state.
- Maintaining clients or continuing to do business in the former state.
It’s not that these activities can’t happen once you move, but they may not do you any favors. How petty can it get? There’s a rumor about a taxpayer whose golf club’s 18th hole was in his former state (New York) while the other 17 holes were in Connecticut. The state of New York did some math and figured that the golfer/taxpayer played enough golf after he left (and, therefore, made enough visits to that 18th hole) to threaten his new residency claims.
In other words, make no assumptions that you’ll be seen off at the border with a smile and a wave. Take your residency tasks seriously and seek tax guidance for your move. Feel free to contact us with questions.