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What Every CEO Should Know About Navigating State and Local Taxes

Defining and determining residency is one among many elements that can prove troublesome for high net worth individuals; and in providing a solid platform for long-term wealth creation and maintenance, it is important to implement strategic tax planning.

In providing a solid platform for long-term wealth creation and maintenance for CEOs and high-net-worth individuals, it is important to implement strategic tax planning. Tax planning is not a solution but a perpetual strategy aimed at educating and ensuring that individuals comply with tax laws and decrease their tax liability.

States differ, not only in their name and geography, but in their policies on taxation as well. In addition to concerns such as asset preservation, estate planning, gift tax strategies and charitable giving, multi-state taxation ranks high amongst this list of priorities due to the intricacies and nuances. There are different standards, rates, and interpretations that apply in each state that can have a serious impact on affluent individuals and families.

Defining & Determining Residency

Every state has its own definition of residency. Some measure in number of days spent in the state, others consider those who rent or own property a resident. In addition, factors such as philanthropic pursuits and investment activities can also contribute to this designation. It is essential for affluent individuals to understand these varying laws, now more than ever. In difficult economic times, states and local municipalities have a lot to gain by claiming affluent residents, while the individual potentially has a lot to lose.

Many wealthy individuals and families own multiple properties, and determining which their primary residence is can be a complicated matter. Due to the varying definitions of residency amongst the states, it is possible to be claimed as a resident by multiple states. Because most states tax their residents on all of their income, including dividends or interest (that are not tied to any particular state), and state tax rates are largely on the rise, this could present a high-priced problem.

Tax Implications Beyond Residency

Even for those CEOs and high-net-worth individuals that have established a clear residency, there are many additional factors to weigh that carry state and local taxes such as business partnerships, estate taxes, property transfers and trusts that earn income in multiple states.

While the majority of states tax non-residents on compensation or a business operating in their state, an individual can, in most cases, receive a state tax credit from their state of residency for non-resident tax obligations paid to other states.

In the case that an individual is, in fact, being double taxed, it is important to know the state’s statute of limitations. Typically, the state has a longer statute of limitations for tax actions than residents have to claim refunds of taxes resulting in what could be double taxation.

Multi-state tax circumstances are highly individual and complex and should be treated as such. Therefore, it is imperative to keep copious records of your whereabouts in case residency is questioned and be well-informed of rate changes and legislation that may affect state and local taxation.

About Michael A. Tedone

Michael A. Tedone, (MAT@filomeno.com) CPA/PFS is a principal at Filomeno Wealth Management, LLC, (www.filomenowealth.com)specializing in investment, estate, retirement and tax planning for high-net-worth individuals.