April 2025
Here are some key takeaways from their conversation:
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Hello, everyone, and thank you for joining me for this episode of The Financial Commute. I've got a great guest here, a friend of Morton's, Chris Passmore, a partner in charge with him. We talked to a lot of clients from time to time about will I save money on taxes if I leave California?
And it's not always clear cut. Like it depends. Right, Chris?
Oh, it's as gray as gray can be. And thank you so much for having me on the financial commute. Excited to talk about this topic, which seems more relevant than ever right now.
You know, we're always both of us, always trying to find, save and, you know, make people money and be creative. But the headlines in California, like you're in the highest possible tax state there is. And it kind of freaks people out that, you know, they're living here and they're paying more taxes than they should. Well, that really depends based on income, because, there's a chance that by leaving California, you're not really saving much in taxes, and there's a lot to think about.
So I'm excited for this conversation today.
Oh, I think this will provide great, great information to your listeners. And I agree with you. I think the headlines, the one-liners catch everyone's attention. But when you actually, I hate to say, do the math, as an accountant, you realize it's really not that simple. And the headlines may not even apply to you.
Right? And so Texas is a popular state because no state income tax versus California, that's got sort of a graduating tax scale that goes up to what, 13.3% is that right?
Correct.
So people say, I'm going to leave California and I'm going to make Texas my primary state, that I'm going to live. But property taxes can sneak up. I mean, parts of Harris County in Texas, which is just outside The Woodlands and Spring, Texas. I mean, your property tax rates could be upwards of 3% and get reassessed every year.
That's one of the biggest challenges with Texas because everyone says no state income tax. But that's right. And at that 3% that's almost three times what you would pay as a California resident. And then when you also factor in the reassessment based on the value of the property on an annual basis, that compounds and you compare that to a California resident who is protected by Proposition 13.
And if your listeners are not familiar, that limits the increase in the assessed value of your California property every year, so your property taxes don't go up significantly if the value of that your home goes up. But yeah, you could pay three times the amount of property tax if you moved from California to the state of Texas.
And it just gets reassessed every year and it gets a little bit out of control. I mean, if you buy a house in Texas and let's say your property tax rates 3%, so you buy a $300,000 house, you feel like it's cheaper than, you know, $1 million house here in California. You're paying $9,000 a year in property tax versus call it 12,000 on $1 million home here in California.
But if your property in Texas goes up to five, five, six, 700,000, then all of a sudden you're looking at close to a $21,000 tax bill. What started out at nine, that can that can sneak up on you real quick.
Oh, and I would take this a step further. I've known a few people who've moved from California to Texas. They're not selling their million dollar house in California to buy a $200,000 house in Texas. They're generally using this as an opportunity to buy an amazing compound in Texas on water. So that's something also to consider. If you're taking $1 million home here and buying $1 million mansion in Texas, you still have that baseline million dollars that could now be subject to property taxes, that again, three times what you pay here.
And I know that we've got challenges here in California with insurance costs, but we're not the only state I mean, Texas and Florida have issues with, you know, property insurance. You also have to be careful because your electricity bill can be higher in other states and here in California. And that could be a surprise hidden cost as well.
But there's a number of factors to think about. Just our great weather of California. And we are blessed with good climate, and we don't need to run air conditioning all year long, especially if you live in Northern California. But think about the weather in Texas. I mean, I I've been to Texas in the summer. It's not moderate, and the the cost of electricity absolutely can creep up on you.
And it's something you have to consider.
Well, I just got back from a trip in Oregon, and one of the things that surprised me is there's no sales tax in Oregon. And so go out to dinner or do things, and I get the bill. And I had to double check that the numbers made sense because, you know, it was $18 and it was still $18.
And so just that sales tax, I was surprised by how nice that was from a reality standpoint that, you know, we pay, what, 9% sales tax here in California, roughly. That was an interesting hidden savings there.
I'm glad you brought that up because I had the exact same experience about a month ago. My daughter and I went to Oregon to visit the University of Oregon. She's a senior in high school, and I had the same experience where I would receive the check at the end of the night after dinner. And I looked at it saying, what's wrong?
What what what did they miss? What do they do not charge for? And I was shocked that savings, that extra 10% lack of sales tax had a material difference to our trip. So I agree with you that that was more powerful than expected. And just to give your listeners some, guidance. So yeah, the average sales tax in California is somewhere between 8 and 9%.
But for us who live in LA, we're actually closer to 10%, which is at the extreme high end, of all the states and the United States.
Yeah. So if you're going to buy a car, any big purchases, California is not as favorable as some other states because of that reason.
Oh, Oregon, back to the example of your trip there with your friends that my trip with my daughter to visit school. Yeah. You don't realize how powerful it is until you live it for a few days and then you realize it does have a material impact to your pocketbook. And it's hard to ignore that.
One of the things as it relates towards, you know, California is an income tax that always, you know, surprises me is you might have somebody that's working and they're looking to retire in the next few years, and they're exploring this idea of retiring outside of California in order to save money on taxes. Odds are pretty good in that in most situations, somebody's income when they're retired won't be as much as when when they're working.
And so they're running this analysis based off of, you know, what they're making now and what they could be saving. But the reality is, you know, different states might tax that retirement income differently. Or it just might not be that big of a lift, because in California, we sort of have that graduating scale of income tax. So let's say you're making somewhere between 200,000 $400,000 a year.
Give me an idea of what they're rough blended, you know, income taxes here or tax rate is here in California.
That blended rate, if you're around a quarter million dollars, is roughly 8%. And that's an important point because again, the headlines always focus on the 13%, which you have to make over about $721,000 a year to trigger that amount. So it's a great headline because it's shocking. But get back to what most people likely earn using that $250,000 example.
As a single taxpayer, it's 8%.
So if you're going to go to somewhere like Arizona or, you know, Florida or Texas or somewhere that you think it's more favorable, that tax rate between 2.5% in Florida off of a couple hundred thousand dollars, you know, that's what, $12,000 a year of savings. But then there are all these hidden extra costs that you have to be aware of, even traveling back and forth from one home to the other.
So this gets back to, as the accountant saying, crunched the numbers because you're absolutely right. Because that's correct. The savings from one state to another might not be this boom, this cash windfall that you expected. Because to your point, when you are looking to retire, you are paying less in taxes. And once you know your true blended rate, if it's $10,000, is it really worth relocating if that's your primary driving factor?
Yeah.
Now you mentioned that if somebody is going to relocate and claim another state as their primary, they have to be careful because California is pretty aggressive and will go after people for this. So what's a checklist? What do people need to do if they're going to all of a sudden move to another state and try to, you know, get around saving money on California taxes?
So the Franchise Tax Board is a challenging organization to work with. And aggressive is exactly the right word. So you want to make sure that almost every tide in California is severed. That can be your principal residence obviously where you work, it could be your doctors, your dentists, your voter registration. It could be where you get your haircut.
You literally should go down the list of where do I interact with other people and find out how to move that to the new state, because that residency audit can deem you a California resident, even if you disagree. And here's what's particularly scary. Some people tend to think that when they leave California, there's a statute of limitations.
And generally, you can say that's 3 to 4 years. But I can tell you if they deem that you should have reported income in California, in their eyes, the statute never started. The statute doesn't start until you actually claim an amount. And you can use a hypothetical. Let's say that California says that you had $10,000 of something that taxable in California.
If you never filed a California return, that statute of limitations never started. It could be ten, 15, 20 years later. You don't get that protection. So some of the best advice I've heard and I've given to clients is even if you're not sure, file something if it's possibly considered a California tax to get the statute of limitations of the clock started.
So you're protected after 3 or 4 years, because if you don't, you are subject in perpetuity.
Wow. That's kind of scary. I mean, when I think about the list that you had, I mean, you had a library card, you had a doctor, you had all of these, you know, great examples of things that you need to change. A number of years ago, I had an executive from ABC retire, and she moved over to Hawaii. She bought a condo, moved over to Hawaii.
She kept a condo up near Big Bear that she would come visit every so often. But because Hawaii did not have, you know, great doctors a couple times a year, she would come out to her place in, in Big Bear and then drive to L.A. to come get medical treatment because it was better than Hawaii. You're telling me that they can retrofit 7 or 10 years later, come back and deem that that income is subject to California taxes?
She's at risk? I would say, in that situation, owning property in California, albeit it's not black and white, that does not make you a California resident, but it puts you on the radar. Yeah. And then if you layer on top of that doctors, then you're even at more risk. So there are shades of gray here. And in a situation like this, I always advise people to be as most protected as possible.
And so if you don't need to have a place in Big Bear, and if you don't need to have your doctors here, you'll only have better protection if the FTB ever comes knocking on your door.
Yeah, especially since there's no statute of limitations.
If it was never fine. Yeah.
One thing that I found interesting in our conversation, our prep work for this, is that, you know, California has an exit tax for certain individuals saying, that's fine, you want to leave California and you're going to do everything by the book. But be careful, because if you're a state, if I get this right, but you're going to correct me if your estate value is north of $30 million, excluding your primary residence, you have to pay an exit tax for leaving California.
It's painful but true. And this is a shocking concept because generally that tax is based on unrealized appreciation of the assets held by that person. And in today's tax world, generally, we don't tax unrealized appreciation. But what California is saying is you earned this appreciation as a California resident, and we know what you're doing. You're leaving the state to avoid taxes.
And therefore, if your tangible net worth is north of $30 million, you are subject to an exit tax of 0.4%. So, to give you an example, if you have someone who wants to leave the state of California and they have $40 million of eligible assets, the amount over 30 subject to the exit tax in this scenario, $10 million.
And that's a $40,000 tax bill.
That's not fun. I mean, I know how much people like paying taxes and the majority of them don't like paying it at all. One of the things that I used to help advise people on as it relates to their deferred compensation plans, people say, hey, I don't want to receive this salary or bonus today. I want to put it in this non-qualified deferred compensation account, and I'd like to receive the income when I'm retired or in a better tax rate.
Most of them click a few buttons and they say, you know, receive it as a lump sum or, you know, the year after I retire. But if they're going to move to another state, we advised on them having the payments done over a ten-year or more period of time. So that way that income was not no longer subject to California income.
So if somebody has a deferred compensation plan they need and they're looking to leave the state, they need to make sure those payments are spread out over a ten year plus period of time. But then in that example, you know, you want to make sure that you change your doctor as you change where you get your haircut, you're very careful about the amount of time that you spend in California versus another state.
Well, and also in addition to protecting yourself against California, consider the state you're moving to. And even though I would never say South Dakota is at at the most desirable places to move to, based on my research, it's one of the most favorable places to live after retirement because there's no state income tax, there's no income tax on Social Security, there's no income tax on distributions from your 400 and K or your IRA.
So you have to think about both sides of the coin. How do you protect yourself from leaving California. And then where are you going. And what's their tax on retirement style assets and benefits.
Well that's interesting. And so when you're going to do the calculation for somebody, does it make sense to leave California and go to another state. You're going to factor in all of these different, you know, scenarios. But then you also take into consideration that the travel costs going from one place to another. Maybe you still have ties in California, family members maybe still like to visit the the great weather that we have, you know, property taxes, insurance costs, electricity bills.
But that's a great thing to know in terms of the uniqueness that South Dakota has, not taxing that type of income.
Oh, it's significant. I mean, at that point, your retirement is essentially tax-free.
So if that's a desirable place for you to live or something you consider, I mean, the spending power you would have in that state is significant.
So I've been to Yankton, South Dakota, in Rapid City, South Dakota. And the Black Hills are a beautiful place to visit. But the winters, I presume, would be really, really cold.
I've never been there, and it's candidly not high on my retirement list. But if you're, you know, tax driven and getting the most out of your retirement, then you have to put it on the list to consider.
You know, is there anything else that you would like for people to know when going through this exercise of like, does it make sense to leave California to save money on taxes?
I mean, I would say the first thing you want to consider is property tax and sales tax, which we discussed. Again, there's this misnomer that Texas is this amazing tax free state. And in reality, it's not when you consider all the other bundles of taxes. And then beyond that, I do think there are other factors. Consider you brought up the great point when we were planning for this, something like your car registration.
I can give you the example right now as a LA resident, my truck is 11 years old. How much do you think I pay every year for my DMV registration?
3 to $400.
Probably $500 a year for an 11 year old truck with 125,000 miles. So all these little things add up. I'm pretty confident in saying that there are a number of other states where the DMV registration would be materially less than what I pay for an 11 year old truck.
Wow. No kidding. Well, an insurance cost to and on ensuring that child you know different here versus other states. The number of people that we have on the road versus other states, I mean, that can all add up. I mean, it's an interesting exercise to calculate, but I just find it really interesting that, you know, people that are sort of in that middle income range of anywhere from, you know, 200 to $450,000 that their tax rate is not as high as what the headlines say.
And so it's not as material as somebody might think.
Yes. So for that quarter million dollars person example, I mean, if you use 8% when you compare that to states that have a state income tax, we're not that different. Candidly, there are the no state income tax locations like Texas and Florida that you have to consider. But beyond those extreme examples, it's not a big difference.
Thank you so much for joining me today. Chris, you know, if you guys have any questions, please reach out to your Morton Wealth Advisor. And we're happy to engage in the conversation with Chris Passmore or your CPA to have further discussions. Chris, thank you so much.
Thank you for having me. Appreciate it.
