Tax Tip: Moving to a New Jurisdiction to Save Taxes

A significant trend that we expect to continue, especially if the proposed federal surtaxes are enacted, is the consideration by individual taxpayers of moving to a new state, moving out of a city that imposes income taxes, or moving to Puerto Rico to reduce their overall individual income taxes.

Consider:

• What are the potential tax savings?
• Can the use of pass-through entity taxes reduce the impact of state and local taxes so that the individual’s incentive to move is sufficiently reduced?
• What is the risk of being considered to be a resident of more than one jurisdiction?
• What is the individual’s income sourced to the state from which he is seeking to move?
• What actions can be taken to mitigate the risks of audit?

A way to reduce federal taxes—and not just state and local taxes—is to become a bona fide resident of Puerto Rico. In contrast to changing your residency for state and local tax purposes, changing your residency to become a bona fide resident of Puerto Rico can be retroactive to Jan. 1st. What this means and what income you can save federal taxes on can be very complex.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Phil Gross is a partner at Kleinberg Kaplan. He provides advice on federal, state, local and international tax issues concerning hedge funds, private equity funds and real estate funds, in addition to other myriad tax issues confronting business entities and individuals.

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