Elon Musk Sets His Sights on Texas as a Sanctuary from California’s High Income Tax

Jan 26, 2021 | Blog

Elon Musk Avoids Taxes by Changing State of Residence

Elon Musk, who claims to have relocated from California to Texas, is one of many billionaires who announced that big tax savings were at the heart of their motive to move out of state. However, Musk is now faced with an ongoing battle to escape taxes in his former home state. This is because billionaires are required to follow strict residency rules when they move to lower-tax states. Any tax lawyer can verify that the avenue through which the wealthy can enjoy these savings is more complex than simply stating they’ve moved from Los Angeles to Houston.

Merely spending a specific number of days in their new state or changing their driver’s licenses or voter registrations is not enough to guarantee that they will not owe tax money to their previous state.

Photo by Mike Mozart/Flikr

Residency Audits, a Complex and Time-Consuming Process

California’s Franchise Tax Board employs approximately 700 auditors whose job is to conduct research on taxpayers who claim they have changed their residency. According to most tax attorneys, residency audits can be very lengthy, in some cases taking several years to complete.

During the audit, a variety of things are scrutinized, including family and community ties, business relationships, and the location of valuable possessions, such as artwork, boats, cars or other expensive items. In addition, state law says that even nonresidents are required to pay taxes on California-sourced income.

For Musk, this could include the proceeds of options earned when he was still living in the state, or profits from any part of his business that operates in California.

Photo by BBC

Musk Still has Business and Personal Interests in California

Musk has thousands of California employees, and this could also be construed as a strong tie to the Golden State. He also shares joint custody of five sons with his ex-wife Justine Musk, all of whom live in California. He is still CEO of both SpaceX, headquartered in Los Angeles, and Tesla Inc., based in Palo Alto. Musk has not commented to reporters about his plans to seek tax relief through changing his residency.

How the Wealthy Save Millions by Relocating

Although it is more complicated than it first appears, it is possible for wealthy individuals to save millions by moving away from states such as California, which has the highest income tax in the country. It’s not surprising that states such as Florida, Nevada, and Texas, which have no income tax, are appealing to the country’s top earners. They must simply convince tax attorneys or auditors that they have truly relocated.

Earlier this year, fund manager Jeffrey Gundlach considered moving from California to a low-tax state and criticized Sacramento lawmakers for floating the idea of tax hikes on “job creators.”

There are also celebrities who have left California for states with lower income tax. Joe Rogan, a podcast host, announced that he was moving to Texas from Los Angeles immediately after signing a multimillion-dollar contract with Spotify Technology SA.

More recently, the pandemic has resulted in many wealthy Americans moving from large cities, such as San Francisco and New York, into second homes in low-income-tax or no-income-tax states.

As for Musk, he appears to be establishing residency in Texas and now has new business sites being constructed in Austin and Boca Chica, Texas. Anyone planning to relocate for the purpose of avoiding high income tax should contact experienced tax attorneys for advice about the best way to accomplish this goal.