10 Reasons for Ultra-High Net Worth to Leave High Tax States

Where to Move – Pros and Cons of the 9 No-Income Tax States

The economic devastation brought about by the COVID-19 pandemic has highlighted, once again, for many business owners and their employees, the potential risks of living in certain states with high taxes. For our most comprehensive wealth management and financial planning guide, specifically written for families looking to invest between $5 million and $500 million, click here to request your free copy.

And now, with the ability to work remotely a more attainable prospect for many more workers than ever in history, the option to leave your high-tax state for a lower-tax one has probably entered your mind as well.

In fact, 66% of surveyed workers at Facebook, Twitter, Google, Uber, and other tech companies in New York, California, and Washington said they would consider moving to a different state if working from home became permanent.

As a high net worth or ultra-high net worth individual, you are very familiar with the cost of living in a high-tax state. Here are ten reasons to consider moving to a lower-tax one.

1. Better Economies

According to one study, the nine states that charge no income tax – Nevada, Texas, Florida, Wyoming, Alaska, Washington, South Dakota, Tennessee, and New Hampshire – produced jobs at a 130% faster rate than the nine states with the highest taxes. The no-tax states also saw 109% more population growth.

And if you’re concerned about your state not having enough tax money to build the roads and pay the teachers, these nine no-tax states also grew their overall tax revenues 51% faster than the nine states with high tax.

Get Your Customized Wealth Management Analysis – No Matter Where You Live

Schedule a chat with CEO and co-founder Hutch Ashoo

2. Big Tech Is Hiring Remotely

Of all the jobs that can most easily adapt to a remote working environment, tech jobs pretty much top the list. As commercial real estate and the cost of living in places like San Francisco continue to balloon way out of proportion with to rest of the country, the tech companies that have fueled the growth in those areas are starting to look elsewhere to their next wave of talent.

According to CNBC, LendingClub reduced its workforce in the Bay Area and moved a bunch of jobs to Utah, and Stripe hired over 100 engineers to work remotely.

Facebook’s Mark Zuckerberg said he wouldn’t start a company in the Bay Area if he started something new today. And Twitter’s Jack Dorsey said his company would do better with a workforce more spread out.

All of these are just headwinds for the coming exodus of talent from high-priced cities in states with high taxes.

Would you rather leave with them or get left behind?

3. Commercial Real Estate Is Cheaper Elsewhere

If you have a business that uses office space, you can find much better rates in lower-tax states because these states tend to have a more reasonable cost of living. Though this has more to do with pricey cities than high state taxes, one often goes hand in hand with the other, especially in a place like New York.

4. Keep More of Your Investment Income

You already pay taxes to the federal government on your income and investments. But tax-heavy states often charge you more on top of that for each. Moving to a no-tax state will save ultra-high net worth investors piles of money, especially for those who earn the majority of their income from investments.

If you are retired or plan to retire soon and have an investment portfolio that earns millions in income each year, leaving a high-tax state may be the best financial decision of your life.

However, if that is your situation, be aware that even though Tennessee and New Hampshire do not charge income tax, they do charge taxes on investment and dividend income. Only the other seven states listed earlier charge no taxes on any income.

Have a High Net Worth Friend Who Needs to Read This?

Please share this article with them on social media.

5. Your State and Local Tax Deductions Are Now Capped at $10,000

A big change made to the tax code in 2017 instituted a cap on state and local taxes that can be deducted from your federal tax returns. This includes property taxes. This deduction used to be unlimited, but now you can claim no more than $10,000.

For anyone living in a high-tax state who earns a top 5% income or owns a lot of real estates, this takes a big bite out of what you used to save on your federal taxes. By moving to a no-income-tax state, this deduction cap will have no effect – you will keep all your income at the state level.

6. No Taxes: It’s In State Constitutions

Several of the no-income-tax states, such as Tennessee and Washington, go so far as to forbid any income tax in their state constitutions. Texas is working on adding this to theirs.

There has been an ongoing attempt by a small minority in Washington to remove this constitutional restriction, but it has never gained enough traction to pose much of a threat, and the state Supreme Court has repeatedly shot down creative attempts to circumvent the ban on income tax.

A chart in this Bankrate article shows that the effective tax rate for high-income earners in the nine no-tax states is just 2.6%. It triples to an average of 7.5% in the 41 other states. Constitutional protection of that lower rate will give you some peace of mind, particularly once you retire.

7. Other Sources of Taxes that Aren’t Costly

Where do these nine no-income-tax states get their tax revenues?

As already stated, Tennessee and New Hampshire take in taxes on investments and dividend income. New Hampshire also has very high property taxes, as do Nevada, Texas, and Florida to a lesser degree. Washington, Tennessee, and Florida have very high sales taxes. And Washington charges one of the highest gas taxes in the nation.

But none of these other tax sources, with the exception of the investment income tax in two states, amounts to a huge portion of wealth for ultra-high net worth individuals. There is no comparison between what you’ll pay in these other taxes and the income taxes you will be saving.

8. Better Weather

The great thing about your choices of states with no income taxes is that they offer a great variety of types of weather. You can have hot and humid, dry, rainy, snowy, cold, windy, sunny, and places that get a little bit of everything. Some of the larger no-income-tax states offer very divergent weather experiences even within the same state.

Western Washington has a rainy reputation (though it doesn’t rain as much as some believe), but Eastern Washington is dry and hot for much of the year and snowy in the winter.

Whatever type of weather you enjoy most, there is a no-tax state that can probably give it to you.

9. Quality of Life – Things to Do

Other than being close to your family, moving to a place where you will enjoy living is one of the biggest factors in deciding where to move if you plan to leave a high-tax state.

And, just like the weather, you have a wealth of choices. There are big cities, rural areas, mountains, hills, beaches, and deserts. You can be near cultural events, film festivals, other artistic events, wineries, and Civil War museums.

You can do hiking and mountain climbing, river rafting, and beachcombing. You can even choose between crowded beaches and quiet beaches.

Whatever you like to spend your time doing, there is a no-tax state that can probably give you a very satisfying place of refuge.

Get Your Customized Wealth Management Analysis – No Matter Where You Live

Schedule a chat with CEO and co-founder Hutch Ashoo

10. Being Near Your Preferred Medical Provider

Especially for ultra-high net worth retirees, it’s quite common to find a medical specialist who helps you best with a particular medical condition who does not live in your state. If you have found a specialist you like who lives in or very near to a no-tax state, and you anticipate needing to see them regularly, this is another factor that may influence your decision on where to move.

Pros and Cons of No-Income Tax States – How to Pick

You have already seen many of the pros and cons of the various low-tax states.

Some, like Washington, have high gas and sales taxes. Washington also has one of the lowest estate tax exemptions. So while it’s a great place to live, it may not be a great place to die for ultra-high net worth individuals. Others, like New Hampshire and Florida, charge high property taxes.

But your decision of where to move will ultimately come down to more than just money. Other factors you must consider include:

• Proximity to family and close friends

• Quality of lifestyle available in the new state

• Compatibility with your business if you own one

• Availability of attractive jobs if you hope to switch employers

• Suitable weather and physical environment

• Real estate options

• Your preferred social environment – don’t move to Alaska if you love urban living.

Personal Income Tax Rates: Which State Has the Highest?

Beside knowing which states have either a flat or no tax rate, you also need to know which state has the highest income tax rates. If you wonder which state has the highest state income tax rate, California is the answer. With a 13.30% tax rate, California gets first place, followed by Hawaii with an 11.00% tax rate. However, California applies the highest tax rate to those who have an income of more than $1 million. The third and next 8 localities are New Jersey, Oregon, Minnesota, District of Columbia, New York, Vermont, Iowa, and Wisconsin. However, New York has changed its tax rates based on the 2021 – 2022 budget from 8.82% to 9.65%, 10.30%, and 10.90%. The highest rate is applied to incomes of over $2 million. Some states, including North Dakota, Alabama, Montana, and many more, have tax rates. If you still have difficulty managing your taxes, you can hire a tax expert; you do not need to calculate your own tax rate. Besides, the state tax department will provide a form that shows your income, tax calculation, or other information regarding your local tax burden.

Which States Have A Flat Tax Rate?

Some states that apply an income tax have different rates based on the income itself. However, some states apply a flat rate even if you are a high-net-worth individual. The following is a list of the states that apply a flat tax rate, from the lowest to the highest:

1. Pennsylvania

2. Indiana

3. Michigan

4. Colorado

5. Utah

6. Illinois

7. New Hampshire

8. Kentucky

9. Massachusetts

10. North Carolina

Pennsylvania applies a 3.07% tax rate, Indiana 3.32%, Michigan 4.25%. At the same time, the highest flat rates are in North Carolina with 5.25%, Massachusetts with 5.00%, and Kentucky has the same tax rate as Massachusetts.

What Is Pillar Wealth Management’s Recommended No-Tax State?

Again – everyone is different, so our recommendation will not be right for everyone when you factor in the other considerations listed above.

But from a financial perspective, after weighing all the pros and cons of the various no-income-tax states, we settled on Florida as the one that offers high net worth and ultra-high net worth individuals the most financially beneficial experience.

For a complete explanation of how we arrived at this conclusion, register your email or click here to see why we picked Florida.

A Word of Warning about Leaving a High-Tax State

They do love the taxable income of their high net worth residents, and they aren’t going to let you go without a fight. And that word ‘fight’ is meant literally, not figuratively. As in, court fights over your residency status.

Many high net worth families own more than one home. Some have tried to leave states with high-tax like New York but have kept second or third residences or vacation homes in the state.

Some of those states have gone after these combined state high net worth residents for state property taxes and even income taxes, especially those who rent out their homes in the states with high tax. And many times, the state wins.

If you own multiple properties in the highest property tax state and aren’t sure you want to sell them all before moving to the lowest property tax state, you need to be very deliberate in establishing residency in your new state.

Here’s how to determine state residency for tax purposes

Get Your Customized Wealth Management Analysis – No Matter Where You Live

Schedule a chat with CEO and co-founder Hutch Ashoo