Skip navigation
COVID-19 and Major Tax Savings for Financial Advisors

COVID-19 and Major Tax Savings for Financial Advisors

The opportunity for advisors and their partnerships to pay less in taxes by changing domiciles is massive—but so are the risks of noncompliance.

Before the pandemic, financial advisors in New York City and San Francisco shouldered high taxes in exchange for access to affluent clients. With in-person meetings canceled indefinitely, financial advisors now have the freedom to establish residency in low-tax states with open space, better weather, and more affordable living. They can join the diaspora of newly remote workers leaving urban America.

The opportunity for advisors and their partnerships to pay less in taxes is massive—but so are the risks of noncompliance. Through a Freedom of Information Act request, my colleagues and I uncovered the numbers. Between 2013 and 2017, New York State conducted more than 15,000 residency audits, which collected $1 billion. 52 percent of nonresidents lost their audit.

One tax lawyer recently told Fox Business that anyone with a New York residence and $500,000 or more in adjusted gross income has between 90 and 99 percent odds of being audited. And now that the coronavirus is decimating state revenues, tax authorities have even more reason to audit aggressively.

First, I’ll discuss the tax savings available to individual partners at your firm. Second, I’ll cover potential savings for your partnerships. Third, I’ll close with advice on how to document your whereabouts with audit-proof data.


Tax Considerations for Partners

Let’s suppose that you own homes in both Manhattan and Delray Beach, Florida, and have decided to relocate to Delray. Combined, NY State and NY City levy nearly 13% on high earners, whereas Florida has no income tax. To enjoy those savings, though, you need to be aware of two issues: domicile change and statutory residency.

Domicile change is a change of your main residence. When a high earner moves from New York to Florida but retains an NY residence, the auditors smell an opportunity. They look at five primary factors to determine domicile: the existence of a residence in New York, your involvement in NY businesses, where you spend your time, where you keep things “near and dear” to your family (e.g., a pet), and your family (e.g., where do your children go to school?).

The second issue, statutory residency, is about how much time you spend in one jurisdiction versus another. You may not have your domicile in NYC anymore, but if you still own or lease a dwelling there and spend 183 or more taxable days in the city, you might be subject to taxes in NY State, NYC, and wherever you’ve domiciled.

Statutory residency is messy even if you relocate to a suburb like in Port Chester, beyond NYC’s nearly four percent income tax. A two-hour lunch in the city would count as full day against the 183-day limit.

For both domicile change and statutory residency, the burden of proof is on you. It is surprisingly difficult to prove where you have not been (something I’ll cover in more detail).


Tax Considerations for the Partnership

While partners can lower their tax burden by establishing a new domicile and remaining below statutory residency limits, taxes on the partnership work differently. In 2019, NYC’s four percent Unincorporated Business Tax (UBT) raised $2.14 billion on partnerships based in NYC. Similar taxes in San Francisco, Philadelphia, and Washington, D.C. are based on where work is done.

Let’s suppose your partnership has ten advisors. If three out of ten advisors live in NYC, and the remainder live outside the city but commute in daily, then in a pre-COVID world, your partnership was subject to a four percent tax on all profits. Today, if five partners work from Florida and five remain in the NYC suburbs but only spend half their working hours in the city, then your partnership would owe four percent on one-quarter of profits -- assuming all partners are equal.

As with residency, the burden of proof is on your partnership. You must be prepared to show auditors where partners were located throughout their work days.


The Best Proof is in Your Pocket

Traditionally, individuals and firms fend off audits using an amalgam of evidence to prove where an individual is physically located, or where work was performed: flights bookings, phone records, credit card transactions, E-Z Pass usage, timesheets and so on. It’s a pain to record and aggregate this data.

By far your best option is to implement mobile and desktop software that automatically records location (e.g., through GPS, wifi signals or VPN services). A credit card receipt for morning newspaper and dinner will not be enough as the burden lies on the taxpayer to prove their whereabouts throughout the day.. Nothing comes close to smartphone location services in establishing a clear pattern of movement.

The point is, if your partners no longer need or want to be in New York or San Francisco (or another city), they and the partnership may as well benefit. There are substantial dollars to be saved by partners and partnerships - just assume that the letter from auditors will arrive one day, and be ready for it.

Nishant Mittal, General Manager of Business Travel at Topia, which offers enterprise companies visibility into employee location and business travel to ensure tax and regulatory compliance for remote and distributed workforces

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.