Call the movers!

Now that the new tax law has limited deductions for state and local taxes, it’s not surprising that some high-net-worth clients are considering moving away from high-tax states.

But relocating isn’t always worth the tax savings — or the hassle. Advisors would do well to help their clients understand the complex tradeoffs long before they start packing boxes.

Bill Schwartz, managing director and principal at Bronfman Rothschild, a wealth advisory firm in Rockville, Maryland, has some clients who live in Maryland and the District of Columbia, where taxes are relatively high. “With many of these clients, we have discussions around tax jurisdictions quite often,” he says. “Although the new tax law, and the resulting loss of a majority of the deduction for state and local taxes, has not materially altered that discussion, it does make the numbers for relocating to a lower tax jurisdiction even more compelling.”

For HNW clients who are shaken up by the new tax law, advisors can run numbers showing tax obligations in 2017 with unlimited SALT deductions, and in 2018, with a $10,000 cap on SALT as well as other new tax provisions. They may be surprised with the results.

Tim Steffen, director of advanced planning at Baird Private Wealth Management in Milwaukee, generated 2017 and 2018 tax results for six hypothetical taxpayers in Wauwatosa, Wisconsin, a Milwaukee suburb. All had six-figure incomes and homes valued far above the national median. In each scenario, the net federal tax for 2018 was actually less than the tax for 2017, despite the loss of SALT deductions that went well over $50,000 in some cases.

That’s because other provisions in the new tax law more than made up for the lost deduction.

Lower federal income tax rates, for example, played a role in reducing the overall tax burden, and one family (with $200,000 of income) benefitted from an expanded child tax credit. The greatest tax savings in this exercise went to the households who could take the newly enacted qualified business income deduction. This deduction is up to 20% of income from pass-through entities such as S corporations, LLCs and sole proprietorships.

And then there’s the alternative minimum tax .

“Many clients have viewed the loss of SALT deductions as significant under the new [tax law],” says Terry LaBant, vice president and senior wealth strategist at Calamos Wealth Management in Naperville, Illinois. “However, if they were subject to the AMT under prior law, they lost the benefit of SALT deductions because these were ignored for AMT purposes. They were already paying higher taxes under prior law; the additional payment was simply hidden under the AMT regime.”

With an increased AMT exemption for individuals and other tax changes, fewer clients will owe the AMT now. “For some people, the loss of the SALT deduction won't be as impactful because they might not have had much benefit from it in the past,” Steffen says. “If they removed their SALT deduction from their 2017 tax return, it's possible their tax liability wouldn't have changed much because of the AMT impact.”

Advisors can point to such numbers and tell HNW clients that if they were able to afford state and local income tax in the past, in many cases, they can continue to do so under the new federal tax law, too.

That said, location matters. Steffen considers Wisconsin to be a mid- to high-tax state, but far less taxing than some others.

“Higher income residents in states such as California, New Jersey and Minnesota are less likely to see the kinds of benefits most Wisconsinites will see,” he says. “Others who are more likely to see a tax increase include people with multiple properties who were used to deducting all their real estate taxes. For those who will be paying more tax under the new law, it's likely that their state taxes are a big reason why.”

Thus, the relocation decision may turn on the current situation. Under the new tax law, how much money will clients save by moving elsewhere?

“For most individuals, the decision on where to live is based more upon quality of life issues than tax issues,” says Schwartz. “However, for clients approaching retirement and those with an expected large income tax event, we run calculations on the tax savings of moving to a lower tax jurisdiction. By putting a number on the decision, I’ve found it resonates a bit better.”

The numbers run by Schwartz generally compare the annual and any potential end-of-life tax savings in the old home versus the new location. For example, a Maryland couple with roughly $350,000 of annual income would owe state income taxes of about $28,000. By moving to Florida, with no state income tax, that amount would be saved.

“Suppose the client has $10 million of assets,” says Schwartz. “Then there also would be state estate tax savings, which could be about 16% of the amount over the current Maryland exemption of $4 million, or around $960,000. So, in a ‘next 20 years’ example, there could be $560,000 of state income tax savings, and (ignoring asset growth) $960,000 of estate tax savings, for a total of just over $1.5 million in tax savings from a move to Florida. Such an exercise can provide a clear understanding of what the clients would be ‘paid’ for a fairly significant lifestyle change. Would they move, and deal with all of the time and aggravation of doing so, for so many dollars in tax savings?”

At Univest Wealth Management in King of Prussia, Pennsylvania, advisors run various what-if scenarios on moving to another state or staying put.

Dave Geibel, a managing director at Univest Wealth Management, runs scenarios on MoneyguidePro software to determine the possible success of a move.
Dave Geibel, a managing director at Univest Wealth Management, runs scenarios on MoneyguidePro software to determine the possible success of a move.

“This analysis considers tax liability over the client’s lifetime,” says Dave Geibel, managing director and senior vice president at the firm. “Other factors, such as the cost of living, are included. We look at how moving might affect the probability of success in meeting the client’s financial goals.”

Recently, he crunched the numbers for a client who was considering moving from high-tax Maryland to low-tax Texas. “Based on the client’s financial plan, this move would increase the probability of success by two percentage points,” Geibel says. “A 96% chance of success in Maryland would rise to 98% after moving to Texas.”

Possible success rate of a move from Maryland to Texas, according to a Univest Wealth Management analysis using MoneyguidePro software.

Such tax-aware relocation generally increases the probability of success by two to three percentage points, he reports, although this difference can go up to five points for younger clients.

As noted, the cost of living elsewhere can play a large role in the relocation decision. “One client decided against moving to Florida after we dug a bit deeper,” says Steven Martin, director at BKD Wealth Advisors in Chicago. “There were other costs that would increase by more than they would save in taxes.” He cites health insurance and auto insurance outlays as well as the loss of their Michigan homestead exemption, which would mean higher overall property taxes.

Martin adds that the health insurance options for this couple in Michigan are better than what they would have in Florida.

“All in all,” he concludes, “moving didn’t make sense.”

By making sense of all the complexity, planners can play an increasingly vital role in these decisions, especially as more clients reach the point when they’re no longer tethered to a job.

While relocating for lower SALT bills may be a good choice for some people, others may look at their overall finances and decide they’ll be better off staying put.

Donald Jay Korn

Donald Jay Korn

Donald Jay Korn is a contributing writer for Financial Planning in New York. He also writes regularly for On Wall Street.