Key Takeaways:
- High-tax states may challenge changes in residency — scrutinizing the number of days spent in the state, domicile intent, and income allocations.
- Income sourcing rules vary by state, increasing complexity for remote workers and business owners with sales, property, employees, or operations in multiple states.
- Strategic charitable giving can provide additional benefits at the state level.
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State and local tax (SALT) planning has become increasingly important for high-net-worth individuals as state and local governments revise their tax regulations in response to revenue needs and economic shifts. The patchwork of rules across jurisdictions brings both risks and opportunities.
High-tax states like California, Connecticut, Hawaii, Illinois, Minnesota, New York, New Jersey, and Vermont frequently introduce new regulations targeting affluent residents and non-residents who spend significant time in the state.
This article explores three critical SALT strategies: residency planning, income sourcing, and charitable giving.
Why State and Local Tax Planning Matters
Unlike the federal tax system, which applies uniformly to all U.S. residents, SALT rules vary widely from state to state and even city to city and can change rapidly.
Some states, like New York, impose high top marginal income tax rates and aggressively audit high earners who claim residency elsewhere. Others, like Florida or Texas, levy no personal income tax but may increase scrutiny around proving residency for new arrivals.
In 2023 and 2024 alone, several states enacted new tax surcharges, adjusted apportionment rules, or announced stepped-up enforcement for residency audits. As mobility increases and remote work becomes the norm, tax authorities are tightening their focus on where taxpayers earn income and where they're truly domiciled.
Explore These 3 Key SALT Strategies
Each of the following planning areas offers a valuable opportunity to reduce state and local tax exposure:
1. Residency Planning: More Than Just a Mailing Address
Relocating from one state to another can be costly if you don't plan for tax implications like income taxes and estate taxes — especially if you move from a high-tax state to one with little to no income tax (i.e. California to Florida). Making your move stick in the face of a state residency audit requires more than buying a home and changing your driver's license.
"Domicile" is an important term in the tax world. It refers to your primary, permanent home. Statutory residency can apply even if your domicile is elsewhere — as long as you maintain a residence in the state and spend a threshold number of days there. For example, New York considers you to be a resident if you spend 184 days or more in the state during the taxable year. Hawaii considers you to be a resident if you spend more than 200 days of the year in the state — and those days don't have to be consecutive.
Many states use time-based tests to determine tax residency, so maintaining a detailed log of your location or recreating the log using cell phone data or travel records can be a crucial audit defense.
Other factors tax authorities consider include where you vote, receive mail, go to the doctor, register your vehicles, and more. Residency audits can look back several years, so it's crucial to maintain a consistent paper trail that aligns with your stated residency.
2. Income Sourcing: Where Is Your Income Taxable?
It's also crucial to understand how income is sourced across states — particularly for taxpayers with multistate businesses, investment properties, or remote work arrangements.
States apply different rules to allocate income. Some use market-based sourcing, which sources receipts based on the location of customers (which can be determined in various ways). Other states use cost-of-performance sourcing, which sources receipts based on the location where the services are performed.
In addition to sourcing rules, states use different apportionment rules to allocate an organization's income across states. Apportionment formulas may consider three factors (sales, property, and wages), a single sales factor, or industry-specific apportionment for certain business models or operating structures.
However, owners of businesses with revenue streams derived from multi-state customers should consider a sales sourcing assessment. A review of sales sourcing can potentially result in a decrease in the apportionment factor (leading to decreased tax liabilities) and minimize audit risks, interest, and penalties down the road.
Even working in another state for a day can lead to nonresident tax filing requirements. According to the Tax Foundation, 23 states have no meaningful nonresident individual income tax filing threshold — meaning nonresidents may need to file an income tax return if they spend a single day working in the state.
Other states have established minimum thresholds for nonresident filing requirements. For example, if you work more than 15 days and earn more than $6,000 in Connecticut, you're required to file a nonresident return there. Meanwhile, Vermont requires nonresidents to file a tax return if they earn at least $100 in the state.
In many cases, you can claim a credit on your home state's taxes for income taxes paid to another state. But even if filing in multiple states doesn't increase your total tax liability, it increases the complexity of your filings.
3. Charitable Giving: Balancing Your Gifts with SALT Benefits
Taxpayers often think of charitable giving in the context of federal tax deductions, but some states offer tax benefits or credits that can increase the impact of your gifts.
Examples of SALT-friendly charitable giving include:
- State tax credit programs: Some states offer tax credits for contributions to certain types of organizations, such as school tuition programs or community foundations. Tax credits reduce your tax liability dollar-for-dollar, making them more valuable than tax deductions (which only reduce your taxable income).
- Donor-advised funds (DAFs): Contributions to DAFs allow you to bunch deductions in a year when income is unusually high due to the sale of an asset or a bonus payout. This strategy potentially optimizes both federal and state tax outcomes.
- Timing and entity selection: Consider whether to give personally or through a business in states with entity-level taxes.
Work with a tax advisor to identify state-level credits or programs that align with your philanthropic goals. Keep in mind that non-cash contributions may require a qualified appraisal and additional documentation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
