Moving From A High-Tax State

FROM http://www.palisadeshudson.com/

As people approach retirement, some succumb to the temptation to move south in pursuit of warmer weather, a lower cost of living and lower taxes. Others, like me, make this choice much earlier in life. Regardless of when you consider moving to a lower-tax state, be sure to examine your priorities and the implications of the move.

Why Your State Of Residence Matters

Just as the United States taxes its residents on their worldwide income regardless of where it is earned, states also have the authority to tax all of their residents’ income, not only that they earn in the state. Generally, if you earn income directly connected or attributable to another state, that state also has the right to tax it, even if you are not a resident. However, your resident state will typically allow a credit for that tax, so you are not double taxed on out-of-state income. After accounting for credits, you wind up incurring the tax of the state where you earn the income or where you reside, whichever is higher. Because your state of residence determines the state taxes you will owe, it pays to live in a low-tax state.

A dollar you do not spend on taxes is a dollar that you can use to improve your lifestyle, accelerate your retirement or increase the amount you can leave to heirs or charity. Tax planning, in general, can have a very significant impact on your financial well-being. Since state tax rates are not as high as federal tax rates, the potential savings from state tax planning are less in most cases. Nonetheless, it makes sense to plan for state taxes because it is easier to move between states than it is to escape the taxing power of the Internal Revenue Service. Higher-income earners can still save a great deal by living in a tax-friendly state. These savings compound over time, so the earlier you move, the better.

That said, taxes are just one part of a budget, and their impact should not be inflated when making life decisions. I was able to move from a high-tax state (New York) to a low-tax state (Texas) while keeping the same career with Palisades Hudson. When thinking about a move, evaluate the income potential and cost of living in your new home state, not only its tax rates. In analyzing these numbers, use estimates specific to your lifestyle instead of general cost-of-living metrics. Consider both one-time and added recurring costs that you might incur as a result of the move. Remember that nonfinancial considerations, such as family, may trump the potential savings of making a move.

An interstate move can also create some one-time tax consequences. If you are moving for your job and you meet certain criteria, you may be able to deduct some moving expenses on your federal tax return. Assuming you move sometime other than at the very beginning or the very end of the year, you will probably need to pay close attention to how many days you lived in each place to determine how to handle your nonresident or part-year resident returns for the year of your move.

Choosing The Right Low-Tax State

Lists of tax-friendly states invariably include the seven states that do not levy personal income taxes. These include the warm-weather states of Florida, Nevada and Texas, but also the cooler states of Alaska, South Dakota, Washington and Wyoming.

Of the 43 states that tax personal income, each has a unique tax code, and some cities and municipalities levy their own taxes, too. Most states charge different rates based on how much the taxpayer earns, while eight states simply impose a flat percentage on all income. The type of income also can make a difference in the tax. For instance, many states exclude a portion of Social Security benefits, pension income or retirement plan distributions from their calculations of taxable income. Two states, New Hampshire and Tennessee, tax only dividend and investment income.

While income taxes are an important starting consideration, a comprehensive analysis of how tax-friendly a state will be for you should also incorporate sales and property tax levels. Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — do not impose statewide sales taxes, though some do permit local or city-level sales taxes. And while it is sometimes hard to compare property taxes among states since different governments calculate them differently, the Tax Foundation found that when adjusting for these variables, New Jersey and Illinois imposed the highest effective average property taxes, while Hawaii and Alabama had the lowest.

You should also factor in any other taxes you are likely to face. For example, you may need to compare state inheritance, estate or gift tax rules. Fourteen states and the District of Columbia impose estate taxes, and six impose inheritance taxes. Maryland and New Jersey impose both. For wealthier individuals, considering the different state transfer taxes can be just as important as evaluating the different income tax rates.

Forbes recently calculated the effective overall tax rate, including income, sales and property taxes, for a single taxpayer earning $50,000 in taxable annual income. For such a hypothetical taxpayer, the publication settled on Wyoming as the lowest-tax option, with Alaska, South Dakota, Texas and Louisiana rounding out the top five. The least tax-friendly state? New York. While the most tax-friendly state for a particular high-income taxpayer will depend on specific circumstances, New York and California are particularly unfriendly to almost everyone.

The Difficulties Of Leaving A High-Tax State

Once you have decided that you want to move to a lower-tax state, you may find it more difficult than you expected. State governments benefit from defining residents narrowly when determining benefits such as in-state tuition for college or homestead exemptions on property taxes, but they are often much more broad-minded when determining whether they retain a right to tax an individual’s worldwide income. To protect their revenue sources, states with high income tax rates often take extreme measures to avoid letting their residents go.

Although the prospect of a clash with tax authorities can add to the stress of a typical move, relocating to a lower-tax state can still yield excellent financial benefits if you plan carefully. Generally, the burden will fall on you to demonstrate that you have abandoned your old permanent, primary home — or domicile — in favor of establishing a domicile in your new state. Abandoning a domicile in a state such as Nevada, which has no personal income tax, is significantly easier than abandoning a domicile in a high-tax state such as New York. But the latter can still be done.

Making a clean, swift and well-documented move is your best bet for avoiding a tax dispute. It will help to save moving receipts and dated copies of the lease or closing documents on your new home. But that alone will not be enough. The more substantial a paper trail you can create, the better. Transfer your voter registration, driver’s license and vehicle registrations to your new state as soon as possible. Update your mailing address on your financial accounts and bills right away.

You will want to notify your former state’s tax authorities of the change as soon as you practically can. Renounce any homestead exemption you may have claimed in your old state, and claim such an exemption in your new state if one exists.

Depending on the reason you moved, you may need to look for a new job locally. Or, if you moved for work, bringing your family with you will help establish that you intend to stay in your new home indefinitely. The same goes for bringing your pets, as well as valuable or sentimentally important possessions. Establish ties to gyms, churches or professional organizations in your new state. While no one person will do all of these things in establishing a new domicile, the idea is to create a big picture that makes clear that your move is a permanent lifestyle change rather than simply an attempt to avoid paying income tax while keeping a foot in your old state.

Of course, there may be compelling reasons you cannot immediately sever all ties with your former home. You may have parents or adult children who remain there. Or your business’s main office may need you to visit in person a certain number of days per year. You may simply wish to keep enjoying aspects of your old home. These realities can mean a slightly more complicated move.

If you plan to spend significant time in your old state, keep a careful travel log with receipts, confirmations and other evidence of where you traveled and when. Most states have a threshold for determining residency status, often 183 days or more spent in a state per year. You will want to be sure you stay under that threshold in the old state and above it in the new one. My colleague Laurie Samay recently wrote an article, “How Do You Know If Your Domicile Has Changed?” that offers more detail on how to navigate proving a change in domicile.

All of this may seem like a lot of work in the middle of an already stressful moving process, but planning ahead can pay off handsomely. High-tax states such as New York and California have aggressively pursued residents who depart for more tax-friendly climates to the point where some critics call the process, in essence, an “exit tax.” Whether you would go that far in characterizing tax authorities’ efforts, the audit and appeal process is unpleasant, expensive and often time-consuming. The more thoroughly and promptly you can demonstrate your change in domicile, the better off you will be.

With a better understanding of how an interstate relocation can impact your taxes, you can decide whether you are ready to join me in making the move.

Preparing for the tax preparer

Here is a rather general list of the information tax preparers like to see:

On the income side:

• Forms W-2 (employee wages) and Forms W-2G (gambling winnings).

• Forms 1099 (all types: Int, Div, B, R, G, SSA, etc.).

• For those that have a sole proprietorship business filing on Schedule C, we need a well-organized and summarized schedule of income, expenses and fixed assets purchased.

• For those who have rental property on Schedule E, we need a well-organized schedule of rental income and expenses.

• If you sold or redeemed any stocks or bonds during the year, please provide a schedule of the dates purchased, cost basis, dates sold and sales proceeds of each security sold or redeemed. Oftentimes, your brokerage house will provide you with this information.

• All Schedules K-1 for pass-through investments such as S corporations, partnerships, limited liability companies, trusts, etc.

• A schedule of any other income (i.e., alimony).

• A copy of the prior year federal and state tax returns

On the expense side:

• All Forms 1098 (mortgage interest, student loan interest, tuition and related expenses).

• A schedule of real estate taxes paid.

• Copy of closing statements for any real estate purchases or refinancing.

• Schedule of medical expenses broken down by prescription drugs, doctors and dentists, medical insurance premiums, long-term health insurance premiums, insurance reimbursements, medical miles driven and any other deductible medical expense.

• A schedule of charitable contributions paid by check or cash.

• All receipts for noncash charitable contributions along with a schedule providing the date of the donation, cost and fair market value of the goods donated, and the method used for determining the fair market value.

• A schedule of any unreimbursed employee business expenses and auto usage including the type of vehicle driven, total miles driven, business miles driven, commuting miles driven and all related auto expenses (gas, insurance, repairs, lease payments, loan interest, parking, etc.).

 A schedule of any investment expenses (safe deposit box fees, IRA fees, etc.).

• A schedule of tax return preparation and tax planning fees paid.

• A schedule of any estimated income tax payments made listing payee, dates and amounts.

• A schedule of any gambling losses (only useful if you had gambling winnings).

Most importantly, for your tax return preparer, try to get the information to him or her as early in tax season as possible. There can be a great benefit for you in having your tax returns prepared early. If you are due a refund, you will receive it much faster, and if you owe money, you will have plenty of time to prepare for your April 15 payment.

3 tips to avoid being scammed by tax preparers

Like the holidays, the sights and sounds of tax season are evident long before its arrival. Tax preparers and related companies are bidding for your tax business now.

Most of these companies and individuals don’t intend any harm, but far too many will take advantage of unsuspecting taxpayers before and during tax season.

1. Look closely at what you’re paying for.

Undisclosed fees are among the most prevalent dangers during tax time. Often, people let a preparer handle their taxes for them without having an upfront conversation about how much they will be charged.

But even for those who do ask for tax preparation prices, there are many hidden fees that don’t get discussed, such as warranties, processing or electronic filing fees, and other items, which make it difficult to comparison shop.

Be diligent to ask as many questions as possible before letting someone prepare your taxes. Ask how fees are determined, and be wary of preparers who base fees on the percentage of your refund, as it could be an incentive for dishonest behavior

2. Tread carefully with refund anticipation checks.

Patience is an important virtue to exercise during tax season. Especially around the holiday season, many companies offer loans to customers that advance one’s anticipated tax refund.

These loans are typically laced with enormous interest rates, some as high as 218 percent. Such loans are often tools to sell professional tax preparation (with high fees) to people who may not otherwise be able to afford it, because the fees are deducted from the refund check. Often, these fees cause a person to lose a significant portion of their refund.

3. Know your tax preparer.

While there are two bills pending in the federal government that would increase oversight of tax return preparers, there are currently no regulations in Wisconsin, which can make it risky to hand over sensitive personal information and complete control over tax processing.

Sadly, many tax preparation scammers target neighborhoods with high concentrations of immigrants or low-income consumers. But there are options.

Consumers with modest incomes can use the IRS’ FreeFile service at www.irs.gov, which provides access to free tax preparation and filing services.

If a taxpayer is not computer savvy, the IRS also provides Volunteer Income Tax Assistance sites that offer free tax preparation for low-income, limited English proficient, elderly and disabled individuals.

You can find a VITA site by visiting www.irs.gov or by calling 1-800-906-9887. These volunteers have to be certified by the IRS, which provides a higher level of accountability.

All taxpayers should ask tax preparers for their IRS-provided preparer tax identification number. It’s also prudent to use established tax preparers who have worked in communities for many years and have developed a good reputation and avoid those who open shop during tax season but leave town immediately after the season ends.

What is a Section 179 tax deduction?

One of the tax planning strategies often employed by small businesses is to purchase long-term capital equipment at year end to reduce taxable income and corresponding tax liability for the current year.

There has been a lot of confusion in this area as Congress has continually changed the rules to stimulate the economy or slow down economic growth. For a small business owner it has been difficult to plan and to know the tax consequences of these capital expenditures over the past several years.

When a business buys certain types of long-term equipment, it typically gets to write off the cost of the equipment over a period of time through depreciation.

In other words, if a company spends $100,000 on equipment throughout the year, it would write off a percentage of this equipment over a period of time such as five years. Writing off the equipment over a period of time is better than nothing.

However, if a business could write off the entire amount in the initial year it might be more likely to add equipment this year instead of waiting until future years.

As part of the Protecting Americans from Tax Hikes Act of 2015 that was enacted in late 2015 the Section 179 deduction limit was expanded and made permanent at the $500,000 level. Without this new legislation the 2015 limit was set at $25,000 based on prior legislation.

This limit is good on new and used equipment, as well as off-the-shelf software purchases. This new limit has also been indexed for inflation for future years as well.

Section 179 of the IRS tax code essentially allows small businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year.

This means that if a business buys a piece of qualifying equipment, the qualifying business can deduct the full purchase price from its income.

This is an incentive created by the government to encourage businesses to buy equipment and make investments in the future.

There are rules to the Section 179 deduction, however.

The new annual cap has been increased and made permanent at $500,000 per year and is being indexed for inflation. In addition, the deduction begins to be phased out if the business made more than $2,000,000 in equipment purchases during the year. This second limit of the $2,000,000 makes the Section 179 truly a small- to medium-sized business deduction as larger businesses would have equipment purchases that far exceed this $2,000,000 cap. You qualify for the Section 179 deduction if you buy long-term, tangible personal property that you use in your business more than 50 percent of the time. You cannot use the Section 179 deduction for purchases such as land, buildings, inventory, intangible property such as patents, copyrights and trademarks, or property used outside the United States. The property must be used primarily for your business. The deduction is not available for property that is used solely or primarily for personal purposes or to manage investments or produce nonbusiness income.

The Section 179 deduction is taken in lieu of taking a periodic depreciation deduction and allows a business to accelerate the deduction for a piece of equipment.

Now that Congress has made the Section 179 deduction permanent and indexed it for inflation small business owners can more effectively plan their capital purchases into the future. Small businesses will no longer have to wait until late December each year to see what Congress will enact for the year that is about to end.

TurboTax free, paid versions are ready for tax filers

Tax season is about to begin

Intuit, the maker of TurboTax, has a bunch of free online what-if tools to help folks start their annual tax season.

The tools, at turbotax.intuit.com/tax-tools, will tell you about how much you will pay the federal government, or how much of a refund you’ll get. One tool tells you how much your penalty will be if you don’t get health insurance, among other bad news items. There’s a free TurboTax online version that Intuit offers for folks whose taxes are simply the difference between money earned and the taxes already paid through withholding. Another tool tells you which version of paid TurboTax (ranging in price from $35 to $150) will serve your needs.

Most tax filers will use the Deluxe version for $35. The latest version, TurboTax for the 2015 tax year, has a breezy feel to it, almost as if Mr. Rogers were doing the interviewing. Entire tax returns don’t have to be done in one sitting. Each time you sign out of the online version, the return is saved to the cloud. That means you can access and work on your return from any device capable of connecting to the Internet.

Intuit makes tax experts available at no cost in the event that you need help preparing your taxes. As an added touch, you’ll be able to see the expert on your monitor, but he or she won’t be able to see you. Free basic help on running the program is available, too.

New law affects charitable contributions from IRAs

What is a 70 ½ birthday? This is a good question.

I would call it an extension of the Mad Hatter’s version of an “un-birthday” from Alice inWonderland. When my dad first explained to me, the idea of 364 celebrations throughout the year, I was ready for my “un-birthday” parties to begin!

In estate and financial planning, 70 ½ is an important age and a new law delivers a possible benefit to those 70 ½ or older.

On Dec.18, President Obama signed into law legislation that made permanent the ability to make charitable donations directly from your IRA. In prior years the opportunity existed but was hard to plan for because the provisions were not permanent.

This new law only applies to those 70 ½. Let me explain how it can be beneficial.

If you own IRAs you must begin taking required minimum distributions at age 70 ½. Under the new law, if you are 70 ½ or older, you can make a distribution from your IRA directly to a charity and count the contribution as part of your required minimum distribution.

This can be very beneficial.

When you begin taking the required minimum distributions from your IRA, you have to pay taxes on the amount you receive.

If you can have the money go directly from the IRA to a charity, the money coming from the IRA is not taxed. And, more importantly, it is not included in your Adjusted Gross Income.

Adjusted Gross Income as reported on your tax return affects many other determinations related to tax deductions, social security benefits and Medicarecalculations.

A lower Adjusted Gross Income is better. Using your IRA to make charitable contributions and counting these contributions from your IRA as your minimum required distribution, which you have to take at 70 ½, makes your Adjusted Gross Income lower and preserves other benefits and tax deductions.

In conclusion, if you are 70 ½ and have an IRA and make charitable contributions to your church or other charities, this new law is worth celebrating.

So go ahead and follow the Mad Hatter’s lead and have an “un-birthday” celebration for you or someone you know when turning 70 ½.

IRS scams are becoming way too common

FROM http://www.theindependent.com/

The call left on my answering machine was unnerving to say the least. The caller identified himself as an Internal Revenue Service agent, complete with a badge number or whatever they call it, and announced that I was the subject of a fraud investigation. He left a number I was to call back as soon as I received the message. It was all very official. Except it wasn’t.

Any hesitation, the voice warned authoritatively, would result in immediate consequences that could include arrest. In all my years of paying income taxes, I had never received such a threat. I haven’t done my own taxes in decades and I wondered why the accounting firm, a large prestigious one, I used hadn’t been consulted since my longtime preparer’s signature was on the return.

Before I dialed the number as advised in the terse “IRS” demand, I took the time to call my tax person to find out.

“Ignore it,” he said, “it’s a scam. These con artists are everywhere. The IRS doesn’t call you on the phone. They send a letter and give you a way to respond.”

Well, they used to, that is. The U.S. Congress in its infinite wisdom has decided to change all this. In the coming year, the IRS will be forced to use private agencies to collect outstanding inactive tax receivables, a method they have had trouble with in the past. While the IRS doesn’t call before issuing a letter, the legitimate private collectors do as well as those who aren’t — the scammers who have managed to bilk millions from vulnerable taxpayers.

Before you start condemning the often much maligned IRS, a favorite pastime for most Americans, the agency objected strenuously to the legislation that authorized the new procedure, pointing out among other things that taxpayers might have some difficulty discerning what was real and what was bogus when the calls come in.

Iowa Republican Sen. Charles Grassley, the self anointed congressional gadfly, who supports using private collection agencies, contends, somewhat naively, that the legitimate collection agencies should also send out a notification letter before making the call. But good luck on that since the legislation doesn’t require them to do so.

If you are lucky enough not to have received a scam call and aren’t familiar with the way the thieves operate, you probably should treat any tax demand, even those that now might be legitimate, with extreme caution. In fact, the Washington Post’s Joe Davidson quoted IRS Inspector General Russell George as warning taxpayers to be on “high alert” for fraud. As to the wisdom of that, the number of cases speak for themselves. Davidson cited Treasury figures showing that in two years ending in October there have been 736,000 complaints about scam calls and that approximately 4,550 victims have been bilked out of a total of $23 million.

How do the scammers operate? Well, they use a variety of techniques. Most prominent is to claim taxes are overdue and that a prepaid debt card or wire transfer must be used to satisfy the obligation. George was quoted as saying that if there is an unexpected call with a threatening message for instant payment, it isn’t the IRS.

The one I received as related above in the column was only the first. To be honest, I am somewhat embarrassed to say, I fumbled around with it, even redialing twice to the number listed and getting no answer on the first and a quick disconnect on the second when I asked whether this was the IRS. That, of course, was before I got smart and called by accountant.

Despite all that, I must have received a least four more such calls, similar but not identical to the first, with the now familiar threat of federal action pending against me. I figured so many scam artists wanted in on the action, they must have run into each other getting to the phones.

Individual aren’t always the victims. The Treasury itself has lost millions upon millions of dollars in false refunds paid to conmen over the Internet who have managed to steal the identities, including Social Security numbers, of taxpayers. Many of the phony refunds are for sizable amounts, $10,000 to $20,000. Since the economic downturn, the IRS has been urged to quickly process apparently without checking returns that claim large refunds.