Wealth taxes turn residency into a deadline

California's November ballot has become a working example of how fast the state-tax math can change for wealthy clients, with one measure imposing a one-time 5% tax on accumulated wealth above $1 billion, retroactive to Jan. 1. Two competing measures, Propositions 41 and 42, are designed to blunt it — one by requiring audits of tax initiatives, the other by barring new taxes on personal assets and retroactive levies.

The California fight is the loudest version of a broader trend, in which wealth taxes and similar proposals are popping up around the country and adding residency as a variable in financial plans.

The existing patchwork already runs uneven: Washington state will apply a 9.9% levy on taxable income above $1 million starting Jan. 1, 2028, Maine has a 2% surcharge on income above $1 million — or $1.5 million for joint filers — retroactive to the start of the year, and New York City's pied-à-terre tax is also on the books.

Proposed measures go further, from a Minnesota bill that would impose a 1% tax on "taxable wealth" above $10 million to California's billionaire tax, which would reach taxpayers and trusts holding more than $1 billion at a one-time 5% rate, applied to anyone who was a resident on Jan. 1.

The California ballot also carries the two measures aimed at the billionaire tax. Proposition 41 would mandate pre-election audits of certain tax-related ballot initiatives, audit special taxes and ban enforcement of certain taxes. Proposition 42 would prohibit new taxes on control or ownership of individually owned assets, retirement holdings and other personal savings, as well as retroactive taxes, and aims to ban the billionaire tax if it receives more votes than the tax, even if the tax passes.

The immediate planning issue is the effective date: a tax retroactive to Jan. 1 means the snapshot is taken before the ballot is counted. California's billionaire tax leaves a ten-month residency gap between the Jan. 1 snapshot and the November vote, and the planning conversation belongs before the client's domicile is set.

Breaking domicile is the hard part, and the states know it. David Heilich, a partner leading the estate, gift and trust group at Armanino, said it is not easy to break domicile once established, especially in states that audit the issue aggressively.

The Tax Foundation counts eight states that cut individual income tax rates this year — Indiana, Kentucky, Mississippi, Montana, Nebraska, North Carolina, Ohio and Oklahoma — which makes the contrast a planning opportunity, but only for clients who can genuinely change residence.

Andy Whitehair, a director in Baker Tilly's national tax practice, sees the residency conversation growing more important for empty nesters and clients who split time between states. Advisors, he argued, may be in a better position than CPAs or lawyers to raise the issue, because the regular meeting cadence of an AUM relationship surfaces a liquidity event before it happens.

Residency planning deserves a scheduled place in the annual plan: wealth taxes are sticky once effective, retroactive dates make them stickier. The Tax Foundation's scorecard shows 13 OECD countries tried wealth taxes and most repealed them, but the years they do last are the years a client can least afford the bill.

This publication has argued that tax alpha is the new battleground for advisors as investment returns commoditize; residency planning is tax alpha of a different sort — choosing the jurisdiction before the gains exist rather than harvesting losses. For a client facing a liquidity event, the decision of where to be domiciled on Jan. 1 can be worth more than a year of harvesting.

The concrete thing to watch is the California vote, and not only for the billionaire tax: the fate of Propositions 41 and 42 will tell advisors how durable any state wealth tax is likely to be. The calendar is the next deadline — Washington's levy begins in 2028, and Maine's surcharge is already in force.