If wealthy don’t want to pay Minnesota income tax, they must sever almost all of their ties of residency.
Attempting to establish residency elsewhere — especially in such states as Nevada, Texas and Florida that have no income or estate tax — is not a new strategy for wealthy Minnesotans. In this photo, members of Florida's Pass-A-Grille Shuffleboard Club --primarily made up of people from other states -- await their turn.
It’s getting tougher for Minnesotans to avoid the state’s taxes by spending part of the year somewhere else.
Snowbirds and high earners are discovering that they must do more than buy a condo in the Sun Belt and register a vehicle there, after a court decision last year reinforced the state’s ability to use any of more than two dozen criteria to determine who is a Minnesota resident.
“People refer to it as Hotel Minnesota,” said Matt Shea, a lawyer at Gray Plant Mooty. “You can come any time you like, but you can never leave.”
To determine tax residency, the state is looking at such things as where people vote, whether they mostly use Minnesota bank accounts and whether they go to the doctor here or in another state. Accountants and lawyers are advising clients who want to avoid Minnesota tax to sell local property and businesses if possible, and definitely to spend less time here than wherever they plan to claim as their new home state.
While the rules apply to anyone, they present a particular quandary for ultra-affluent people who are more likely to split their time between homes in Minnesota and low-tax Sun Belt states. A new, higher tax bracket for the biggest incomes has increased the incentive for these people to claim an out-of-state home as their primary residence.
But disregard any of the 26 rules set forth by the Department of Revenue, legal and financial advisers say, and would-be Minnesota expatriates risk receiving a tax bill in the mail and likely losing in court if they contest it.
“It’s hard for people who still want to keep some ties to the state they started in,” said John Bedosky, an attorney for Eide Bailly, an accounting and consulting firm. “You’ve got to sever almost all of your ties.”
Attempting to establish residency elsewhere — especially in such states as Nevada, Texas and Florida that have no income or estate tax — is not a new strategy for wealthy Minnesotans. But the creation of the new, higher top income bracket has raised the stakes.
The new bracket, approved last year, raised the income tax rate from 7.85 percent to 9.85 percent for married joint filers who make $250,000 per year and singles who make $150,000. Minnesota, which is already one of 19 states that impose its own estate tax, now has the fourth-highest income taxes for the wealthy in the United States.
Classes in how to switch states
That’s been the final straw for clients of Joel Germershausen, an accountant at Baker Tilly. He and Shea have both been giving presentations on how wealthy clients can switch residency in an orderly, bulletproof way. Both say interest is growing.
“There’s certainly an uptick in the conversation,” Germershausen said. “It’s a disincentive to remain in the state.”
There is no evidence of widespread flight to low-tax states by the wealthy, but the Department of Revenue hasn’t started auditing 2013 tax returns yet. That will begin later this year.
“We haven’t been more aggressive this year compared to previous years,” Ryan Brown, a spokesman for the Department of Revenue, said in an e-mail. “We are always conducting audits, and residency audits are a piece of those.”
The new income tax bracket for the wealthy is projected to generate $1.1 billion in new revenue over two years, 5.4 percent of all individual income tax revenue for the state. In total, the 257,000 households in the top 10 percent for income are projected to pay $4 billion in income taxes in 2015, or 55 percent of all state individual income taxes.
A decision a year ago by the state’s Supreme Court in the case of truck dealership owner William Larson destroyed any illusions that one could easily keep one foot in Minnesota while not paying its taxes.
Larson was audited for the tax years 2002 through 2006, years he filed as a nonresident living in Nevada. The Department of Revenue decided he was instead a Minnesota resident and ruled in 2009 that he owed $2.5 million in income taxes.
Larson owned a network of Peterbilt semitrailer truck dealerships and had lived in Nevada in the 1980s. He bought a condo in Nevada in 1998, and tried to buy a Peterbilt dealership there. He registered to vote there, registered two vehicles and got a Nevada driver’s license. He spent less than 183 days each year in Minnesota — the minimum standard for nonresidency.