States crack down on tax break for wealthy investors

A version of this article originally appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to high-net-worth investors and consumers. become a member to receive future editions straight to your inbox.

Lawyers for the wealthy told Inside Wealth that a wave of states deciding to target a tax incentive toward investors and startup founders could prompt some high-net-worth residents to move.

The One Big Beautiful Bill Act accelerated tax cuts on qualified small business stocks, better known as QSBS. But some states, including Maine and Oregon, have targeted the tax incentive in response to federal funding cuts.

“Tax policy has both good and bad consequences, and I think states need to find what makes the most sense for them,” said David Blum, partner and chairman of Akerman’s national tax practice group. “Someone looking for a major exit may already have more than one home.”

Blum noted that many billionaires have made high-profile departures from California as the state’s billionaire tax proposal gains momentum. Google Co-founder Sergey Brin, who has purchased mansions in Nevada and Florida, is financing two ballot initiatives targeting the wealth tax measure.

The QSBS exemption, introduced during the Clinton administration, was designed to encourage investing and starting small companies. Federal regulation allows investors and founders to reduce capital gains taxes when selling shares purchased directly from a qualified C corporation.

To benefit from the full exemption, the stock must be held for more than five years. Before OBBBA, the maximum exemption from capital gains taxes was $10 million or 10 times the original investment basis, whichever is greater. OBBBA increased this exemption to $15 million. The bill also increased the maximum size of qualified “small businesses” from $50 million to $75 million in gross assets.

Last month, Maine and Oregon passed legislation to opt out of the federal QSBS exemption; This means taxpayers will have to pay state income tax on startup exits. Similar efforts in New York and Washington state failed. The District of Columbia Council voted to depart from several provisions of the OBBBA, but Congress passed a resolution blocking that move.

Four states currently tax QSBS: Alabama, Mississippi, Pennsylvania, and most importantly, California, the nation’s venture capital center.

Proponents of QSBS reform argue that the regime primarily benefits the rich. Research conducted by Department of Treasury It found that taxpayers earning more than $1 million accounted for nearly 75% of excluded earnings.

Attorney Steve Oshins told Inside Wealth that QSBS laws and other tax proposals targeting the wealthy encourage high-income earners to move to other states.

The tax burden depends on where shareholders live when they sell their shares, giving clients time to plan. Oshins said it is possible in some states to use trusts to avoid state income taxes on QSBS. Delaware, Nevada, and Wyoming are popular areas for establishing these trusts.

For example, an Oregon resident can transfer his shares to another company, he said. incomplete trust of the non-donor It was established in a state such as Nevada, which does not tax foundation income. As long as the trust is not managed in Oregon and none of the trustees live there, the trust’s capital gains will not be subject to Oregon income tax.

But other states, including Maine, have stricter rules, he said. Non-donor trusts will be subject to state revenue if they are funded by a Maine resident or created by someone’s will, according to Oshins.

However, the simplest course of action is to move.

“Let’s say a client is about to hire me and says, ‘I have a summer vacation in Florida, I’m thinking of moving there,'” Oshins said. “I’ll say, ‘Let’s wait a few months. Let’s move there. Then let’s build your trust.'”

But changing your residence is easier said than done, Blum said. To qualify with state tax authorities, customers must do more than change their voter registration and spend at least 183 days in another state.

“When it comes to changing your residence and place of residence, you really have to move and uproot your life,” he said.