TurboTax 2015 Review

This year, the Intuit software adds some great new features. As always, it’s available in multiple versions at several price points, and it’s a functional, step-by-step software just about anyone can use.

New Features for 2015

TurboTax has long been one of the best-known tax-filing software companies on the internet. Since it already does a great job, it doesn’t change much from year to year. However, Intuit has introduced a few useful new features recently, including:

• An App: As more and more Americans move from traditional desktop and laptop computers to mobile, online software companies follow suit. TurboTax is now available on a mobile app that allows you to file your taxes on your phone.
• Affordable Care Act: TurboTax always seems to be up-to-date on the latest tax laws, and that’s no different with the Affordable Care Act and the related tax issues. You’ll find all your health insurance forms built right into this year’s software.
• Benefit Assist: TurboTax will automatically assess whether or not you qualify for additional government benefits, such as Medicaid, Food Stamps, discounted utilities, and healthcare discounts.

Along with these recent features, I always find that TurboTax includes all the latest information I need to know for filing my taxes. And if I have questions, they have a great help center with up-to-date information on the deductions, schedules, and other issues I need to know about.

The Levels

As with most tax services, TurboTax comes with several different levels of service, depending on your needs. Some taxes are more complex to file than others, so you’ll pay more for these services. Not sure what you need? Here are the basic levels TurboTax is offering in 2016:

Absolute Zero

Your taxes have to be pretty simple to qualify for this level with TurboTax, but it’s an excellent deal. You can file both your federal and state income taxes for free as long as you meet the following qualifications:

• Made less than $100,000 in 2015
• Don’t own a home or rental property
• Didn’t sell any investments
• Don’t own a business or have 1099 income
• Don’t have any major medical expenses

Of course, this is very basic. However, if you meet these qualifications, this product will cover everything you need.

Deluxe

This is the most common option for TurboTax customers. If you don’t meet the qualifications for the Absolute Zero deal, chances are likely you’ll fall into this category.

Besides basic forms, this option includes Schedule A which allows you to file for various deductions and credits – including the mortgage and property tax deductions. If you qualify for the Earned Income Credit, child and dependent card credits, and other common deductions and credits, this is likely the best option for your needs.

If you’re a freelancer or 1099 contractor, you may be able to get by with the Deluxe option. It allows for filing 1099-MISC forms and simple expenses, including standard vehicle mileage, cell phone expenses, and miscellaneous expenses under $100. Deluxe does not, however, cover deductions for a home office, meals, entertainment, legal and professional fees, or many other common business deductions.

In the past, I’ve had to use the Home & Business version of TurboTax because I’ve taken a home office and other business deductions. It costs a bit more, but I needed the help. However, this year my freelance work has moved from center-stage to side gig, so I’ll take very few deductions – allowing me to use TurboTax Deluxe, instead.

One thing to note: You can always start out with a cheaper version of TurboTax and  bump yourself up later if you need to. If the version you start using doesn’t have all the features you need, you can upgrade to the next version. Since you don’t pay until you actually hit “file,” this isn’t an issue.

Right now, the Deluxe option is $34.99, though the regular price is $54.99. File early to take advantage of the discount price!

Premier

If you’ve followed Dough Roller’s advice and invested heavily this year, TurboTax Premier may be the software you need. This option covers everything included in Deluxe, but it also covers Schedules D and E.

Schedule D is used for stocks, bonds, ESPPs, and other investment income. This schedule in TurboTax automatically imports investment income, including cost basis, which makes your tax filing life much simpler.

Schedule E is used to record income and expenses related to rental properties. If you’re a landlord, this is the option you want.

Premier is currently priced at $54.99, but is regularly $79.99.

Home & Business

If you run a larger business or have employees, you’re out of luck with TurboTax and most other tax filing software. You’ll need a real accountant to make sure your taxes are filed properly. But for a small business owner or sole proprietor, the Home & Business version may include everything you need.

This version includes everything in the Premier version, and adds Schedule C, where you report self-employment and small business income and expenses. This schedule will work even if you have relatively large expenses or are dealing with asset depreciation. The asset depreciation function is especially nice, as I found when using this version of TurboTax the last few years to depreciate some of the tech I use for freelancing.

The regular price of TurboTax Home & Business is $104.99, but you can get it for $79.99 right now.

Additional Benefits

Each level of TurboTax gives you access to additional tax forms, custom prompts, and fill-in-the-blanks to assist you in filing those forms. But all versions also come with additional benefits, including:

• W-2 Auto Fill: If you work for a relatively large employer, chances are that TurboTax can find your W-2 information for you automatically. This doesn’t work with every employer, but it is handy for some.
• E-File: E-filing keeps you out of the super-long post office line in early April, and may get you a refund faster, too. Typically, you can e-file both your federal and state taxes, though filing state taxes may cost more.
• 24/7 Access: TurboTax gives you access to your tax forms all the time online. This is handy if you want to fill them out a bit at a time, rather than in one sitting. It also makes it easy to print off additional copies of your tax returns if you’re buying a home or filling out other major paperwork in the coming years.

Additional benefits for the paid levels of TurboTax include:

• ExplainWhy: These pop-ups within the TurboTax software show you “why” certain things are the way they are when you file your taxes.
• My Analysis and Advice: This service will analyze your tax history for the year and will explain how you can take steps to maximize your tax refund in the coming year.
• Tax Experts: With the paid levels of TurboTax’s software, you can talk to a tax expert through chat at any time. This can be helpful if you have a more interesting question that isn’t answered in the robust community forums on the TurboTax site.

A Walk Through

One thing I’ve always liked about using TurboTax is its interface. It’s clean and easy to use, plus it walks you through each part the process step-by-step. For me, TurboTax has always provided the right level of support without being too in-my-face with tips, tricks, and tutorials.

For instance, if you sit down to do your taxes all at once, you can walk through each step of the process in the order TurboTax gives it to you. It’s intuitive and makes sense. For me, though, I often take steps out of order – filing various W-2s and 1099s as they come in. It’s easy to skip around to the steps you want to work on, and TurboTax won’t let you file without at least checking on each step.

The Bottom Line

The bottom line here is that TurboTax has managed to come up with a great, user-friendly tax-filing software yet again. With the various levels of service available, it can work for nearly anyone.

Not sure which level you need? Start with the most basic option and work your way up as needed. Since you don’t pay until you actually file, you can always upgrade. Downgrading is often more difficult, though, so it’s best to start with a more affordable option than you think you need. That way, you don’t wind up accidentally paying for services you don’t really need.

As always, be sure you follow each step in the process and have TurboTax double check for holes you forgot to fill out. And if you have questions, ask. Get help from the support available through TurboTax, or take your taxes to a professional who will file them in person if things get really complicated. It’s better to pay a bit more to file your taxes on the front end than it is to risk a gross overpayment or an audit!

8 tax moves to make at the start of 2016

FROM MARKETWATCH.COM

For the first time this decade, we’re starting a year with tax laws that will remain in place for one to three years — or longer. The Protecting Americans from Tax Hikes Act of 2015, passed in December 2015, has made certain key provisions permanent, extended some tax provisions through the end of 2016, and others through 2019. So taxpayers can do some tax planning without worrying about certain tax laws changing.

Throughout this year, we will give you more details about how to take advantage of the new laws. For now, let’s start with a handy-dandy January to-do list:

1) If you’re using your car for business, write down its odometer reading. If you didn’t do it on Jan. 1, no worries. Write down today’s reading and estimate how many miles you drove in the last week — for business and for personal. It’s early enough that a good guesstimate will work.


2) It’s time to submit a new W-4 form to your employer if your marital status, number of exemptions or other key personal details have changed. Let them know if you are married or single. And how many exemptions you want to claim. The IRS has a withholding calculator you can use.


3) Look at your tax return from last year and make a list of all the places from which you are expecting to receive documents — employers (W-2), customers (1099-MISC), merchant banking & Paypal (1099-K), investments (1099-INT and 1099-DIV), pension and IRA accounts (1099-R), sales or dispositions of real estate (1099S, 1099-A, 1099-COD, etc), mortgage lenders (1098), state payments and refunds (1099-G), and so forth. Make note of accounts that you closed out last year (or establishment names that were changed). Add the changed sources to your list.

4) If you had taxable winnings from casino gambling, you would have received a W-2G form from the venue right on the spot. It will not be coming in the mail. But the IRS has a copy — so remember to include that income. You will be able to deduct gambling losses only up to your winnings — as itemized deductions on Schedule A. Incidentally, the IRS issued a new procedure for slot machine players to use. Consider reading Revenue Procedure 2015-21. If you don’t understand it — take it to your tax professional.

5) Did you move last year? Your employers, banks, etc. might have the wrong address for you. Send them updates immediately — call them and fax or email the information so they get your correct address soonest. One of the most common complaints TaxMama.com gets is from people who didn’t receive their W-2s and 1099s — because they moved and forgot to notify the relevant issuers.

6) If you’re a business owner, you should be issuing Form 1099-MISC to anyone who provided services or paid rent — if they were not incorporated. If you don’t already have each vendor’s name, address and tax ID number (especially via a Form W-9), get on the ball and start collecting that information immediately. But beware: The vendors and freelancers who were not planning to pay taxes on their earnings will get really hostile when you ask for their tax ID numbers.

You need to send the 1099s to recipients by Jan. 31 – even though you may not have to file the forms with the IRS until March 31. The penalty just rose to $250 for each unfiled or incorrect 1099-MISC you issue. And many vendors, affiliates, and freelancers get antsy when the forms arrive late.

In fact, establish a policy for 2016. Before issuing a check to any freelancer or service provider, have them provide you with a signed Form W-9. It will save you a lot of trouble — and fights — next January.

7) Get proof of your — and your family members’ — health insurance coverage. Along with this, you will need to know the income of all members of the household in order to compute the health care credit or penalty. You’ll find new lines on your Form 1040. Line 61 deals with the tax/penalty for not having health care coverage. Line 69 is for the additional tax credit you can get from Form 8962 if your income dropped below your projection. In addition to household income, Form 8962 asks about your monthly health insurance payment, your monthly premium tax credits…and so much more. (You will want to read the instructions.) This is the most complicated form that the IRS has ever issued for individuals to fill out.

8) Did you officially change your name in 2015 because you got married or divorced -- or just didn’t like the one you had? While you may have updated that information on your credit cards and driver’s license and such, the IRS won’t have that information. Update your name on your Social Security record. Until you change the name on your SS card, use your previous name on your tax return. Don’t worry about the name on the W-2 or 1099 not matching this tax return.

Consumer alert: Tax Time Warnings!

The Internal Revenue Service announced filing season opens Tuesday, January 19.

It expects more than 150 million tax returns to be filed this year.

According to the IRS, last year the average refund was $2,797.

For many folks, that's a lot of cash, but be warned, taxpayers should be careful during tax season to not fall for common pitfalls that will cost more money in the long run.

Signs advertising tax preparation services pop up all around town.

However, keep in mind, flashy signs could be a warning sign.

Beware of Preparers Making Big Promises

Taxpayers should think beyond a quick refund.

You're going to these companies that spring up from now through March, because by March all of the quick money is gone, and you're giving them all of your information.

Which then possibly puts a person's identity at risk.

Companies start by luring customers in with holiday loans and later refund anticipation products.

Then, some preparers will take that information left behind and file without the taxpayer's permission.

The shady companies use last pay check stubs, then file in masses the first day the IRS allows submissions.

The taxpayer now goes somewhere else to file and it comes back saying someone else has already filed with your name and social security number.

So, now the taxpayer has to wait months to get their refund from the IRS, plus, deal with the costly implications of a loan.

Avoid Loan Products 

It's a loan, nothing more nothing less, and you're going to pay a fee for that as well as the tax prep fee.

Watch Out for Tax Scams

This includes the now notorius phone calls from people pretending to work for the IRS.

First of all, the IRS is not going to call you, they're going to send you a letter first and ask you to call them.

The most important piece of advice is for people to guard their identity.

That's my main warning, protect your information. Just because a person puts a store front sign up saying they're doing taxes does not mean they're legit.

It's also important to note, no preparer can guarantee a refund or a certain amount of money.

Many taxpayers qualify for the Earned Income Tax Credit.

This can lead to a very large refund, and claiming the credit doesn't necessarily require the expertise of a preparer with a slick store front.

Countdown to Tax Season: IRS to Start Processing Returns on Jan. 19

The Internal Revenue Service will open the nation’s 2016 individual income tax filing season on Jan. 19, with more than 150 million tax returns expected to be filed this year.

People will have several extra days to file their tax returns this year. Taxpayers have until Monday, April 18, to file their 2015 tax returns and pay any tax due because of the Emancipation Day holiday in Washington, D.C., falling on Friday, April 15. Taxpayers in Maine and Massachusetts will have until Tuesday, April 19, because of Patriot’s Day observances on April 18.

The IRS expects more than 70 percent of taxpayers to again receive tax refunds this year. Last year, the IRS issued 109 million refunds, with an average refund of $2,797.

“IRS employees have been working hard to get ready to help taxpayers this filing season,” IRS Commissioner John Koskinen said. “As part of our Security Summit initiative, the IRS has been working closely with the tax industry and state revenue departments to provide taxpayers with stronger protections against identity theft during the tax filing season.”

The IRS encouraged taxpayers to plan ahead and take advantage of the online resources available on IRS.gov.

“IRS.gov is the best place for taxpayers to go for information about filing their income tax returns this year,” Koskinen said. “Although we will have more people staffing our phone lines this year, we expect those lines to remain busy so we encourage people to visit the web first as the quickest and easiest way to get assistance.”

e-File and Free File

More than four out of five returns are expected to be filed electronically, with a similar proportion of refunds issued through direct deposit.

Choosing e-file and direct deposit for refunds remains the fastest and safest way to file an accurate income tax return and receive a refund. The IRS anticipates issuing more than nine out of 10 refunds in less than 21 days. The IRS Free File program, available at IRS.gov, opens Friday, Jan. 15, and the IRS will begin accepting and processing all tax returns on Tuesday, Jan. 19. Commercial partners of the IRS offer free brand-name software to about 100 million individuals and families with incomes of $62,000 or less. Seventy percent of the nation’s taxpayers are eligible for IRS Free File.

All taxpayers regardless of income will again have access to free online fillable forms, which provide electronic versions of IRS paper forms to complete and file. This option, available through IRS.gov, is free.

The IRS also reminded people to plan ahead, especially students and home buyers who request a copy of a tax transcript or tax return information for a specific year using the online Get Transcript tool. They should allow five to 10 days from the time they make the request to receive it by mail.

Protecting Taxpayers from ID-Theft-Related Refund Fraud

The IRS is working diligently with state tax authorities and the tax industry to address tax-related identity theft and refund fraud. As part of the Security Summit effort, stronger protections for taxpayers and the nation’s tax system have gone into effect for the 2016 tax filing season.

The new measures attack tax-related identity theft from multiple sides. Many changes will be invisible to taxpayers but help the IRS, states and the tax industry provide new protections. There will be new security requirements when you’re preparing your taxes online, especially when you sign in to your tax software account, to better protect your tax software account and personal information.

Despite these security improvements to fight identity theft issues, the IRS will still process nine out of 10 federal refunds within 21 days. States have their own refund processing time frames that may vary, and some states may make additional reviews to ensure refunds are being issued properly.


Health Care Basics

Similar to last year, meeting the tax obligation of the Affordable Care Act for the vast majority of taxpayers will simply mean checking a box to verify everyone on their return has health coverage. For others, IRS.gov/aca features useful information, tips and interactive online tools to help taxpayers with the premium tax credit, the individual shared responsibility requirement, and other tax features of the ACA.

The Affordable Care Act requires that a taxpayer and each member of their family either has qualifying health coverage for each month of the year, qualifies for an exemption, or makes an individual shared responsibility payment when filing their tax returns.

Here are some important ACA reminders:

• Check the box: Like last year, the vast majority of taxpayers will simply check a box on their tax returns to indicate that each member of their family had qualifying health coverage for the whole year. No further action is required to report coverage.

• Claim a Coverage Exemption if you qualify: If you or anyone on your return did not have coverage for the entire year, you should determine if you qualify for one of the many coverage exemptions that are available. You can use our online interactive tool to help determine if you qualify.

• File to reconcile Advance Payments of the Premium Tax Credit: If you enrolled in coverage through the Health Insurance Marketplace during 2015, you most likely received the benefit of advance payments of the premium tax credit. You must file a tax return and submit Form 8962 to reconcile these payments with the actual premium tax credit to which you are entitled. You will need Form 1095-A from the Marketplace to complete Form 8962. Failure to reconcile your advance payments of the premium tax credit on Form 8962 may make you ineligible to receive future advance payments.

• Don't wait for 1095-B/C: Many taxpayers will receive a Form 1095-B or 1095-C with information about their health care coverage. You may have heard that the IRS has extended the time for health coverage providers and employers to furnish these forms. You should be aware that you don't have to wait for these forms in order to file your tax return and you don’t have to send these forms to the IRS. You can rely on other information to determine your health coverage. The IRS has additional information about these forms in questions and answers on IRS.gov/aca.

• Wait for Form 1095-A: If you enrolled in coverage through the Marketplace you should receive Form 1095-A from the Marketplace with important information that you need to accurately file your tax return. Unlike the Forms 1095-B and 1095-C, you should wait to file your tax return until you receive your Form 1095-A. Contact your marketplace with questions about your Form 1095-A.

Low- and moderate-income taxpayers can get help meeting this health-care requirement and filing their return for free by visiting one of the more than 12,000 community-based tax help sites staffed by more than 90,000 volunteers that participate in the Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) programs. To find the nearest site, use the VITA/TCE Site Locator on IRS.gov.

myRA

In November, the Treasury Department launched myRA, a new, simple way to open a starter retirement account. myRA has no fees, and participants can fund their myRA accounts through a:

• Payroll deduction. Set up automatic direct deposit contributions to myRA through an employer.

• Checking or savings account. Savers can also fund a myRA account directly by setting up recurring or one-time contributions from a checking or savings account.

• Federal tax refund. At tax time, you may direct all or a portion of a federal tax refund to your myRA account.

For more information about myRA or to sign up for an account, visit www.myRA.gov.


Assistance Filing a Tax Return

Well over 90 percent of all tax returns are prepared using tax return preparation software. This software generally includes tax law help along with reminders and prompts about tax breaks and responsibilities. The IRS also reminds taxpayers that a trusted tax professional can also provide helpful information about the tax law. A number of tips about selecting a preparer and national tax professional groups are available on IRS.gov.
The IRS urges all taxpayers to make sure they have all their year-end statements in hand before they file their return. This includes Forms W-2 from employers, Forms 1099 from banks and other payers, and for those claiming the premium tax credit, Form 1095-A from the Marketplace. Doing so will help avoid refund delays and the need to file an amended return later.
IRS YouTube Videos
• When Will I Get My Refund: English |Spanish
• Welcome to Free File: English
• IRS Tax Payment Options: English
• Security Summit Identity Theft Tips Overview – English
• Taxes.Security.Together. – English

3 Tax Tasks to Tackle Now

FROM http://money.usnews.com/

If you're one of those people who every April curses themselves and says, "Next year, I'm going to start doing my taxes early," well, guess what? It's next year – and it's early. So if you want this to be the year you don't file at the last minute in a sweaty panic, here's what you should be doing now.

Gather that paperwork. Let's assume you've been to the ball before, and you know the dance moves here. We won't spend much time on this. Just know that you should gather paperwork related to anything you'd want to show the IRS to substantiate any deductions you're taking. That paperwork includes:

Anything the IRS sends you. Also be sure to put everything in a designated folder, says Thomas Walsh, an Atlanta-based certified financial planner with the Palisades Hudson Financial Group.

"In January, you will begin to receive important tax documents online or in the mail, such as Form W-2 reporting employment income or Form 1099 reporting taxable investment account activity," he says.

Receipts. These would be for things like charitable or medical deductions, as well as any paperwork related to any mileage you deduct.

Hopefully, you're keeping a mileage log, says Garrett Gregory, a former IRS attorney who runs Gregory Law Group, a Dallas-based firm that specializes in taxes, with his wife, Deborah.

"However, the IRS can challenge a mileage log. So in addition to the log, we need something that substantiates the total miles driven for the year," Gregory says. "An easy way to do this is show an oil change receipt from the beginning of the year and one from the end of the year. This will show that the total number of miles claimed on the mileage log is reasonable."

Estimated tax payments. If you're self-employed, make sure you have copies of the estimated tax payments throughout the year and hand that to your accountant, says Chris Smith, a certified public accountant and owner of CB Smith & Associates Inc., in Cumming, Georgia.

Or, if you're doing your taxes yourself, gather them – you'll still need them, unless you have an amazing memory.

"A lot of people are confused on when the payment was made versus for what tax year the payment was for," Smith says. "For example, an April payment could be for the current year's estimated taxes or a prior year tax payment made with the filing of an extension. Individuals need to distinguish that."

And you may want to talk to your boss about your taxes. "Check with your employer now to see if you can be reimbursed for any work-related expenses you've incurred over the past year," says Mike Campbell, a San Francisco-based tax partner at BDO USA, a business services practice headquartered in Chicago.

Campbell also suggests that while you're immersed in paperwork, you put anything aside you can, or write anything down or save receipts that might help you organize your taxes for next year.

"Postponing the gathering of data later in 2016 often can lead to missed deductions just due to the passage of time. Get a head start while it's still fresh," Campbell says.

Look for ways to reduce your tax bill. Think of the usual suspects, like retirement funds and your kids' college education.

For instance, Deb Repya, vice president of advanced markets for Allianz Life, says, "People often overlook the ability to make contributions to a Roth IRA."

She adds that "this is a great strategy because qualified distributions from a Roth upon retirement are income-tax-free, even growth within the account. Even better, these contributions can be made up to the April tax filing deadline and still apply to your 2015 tax return, though [they are] not tax deductible."

Or, again, maybe you can reduce your tax bill by doing something you want to do anyway: Put money into your child's college education.

"Depending on the state you reside, you may be able reduce your state tax bill for 2015 by making a contribution to a section 529 college savings plan," Walsh says.

Make an appointment now to do your taxes soon. Make the appointment with yourself if you aren't hiring a tax preparer. Circle a date on the calendar in February or early March and stick to it. But if you get a lot of tax-related paperwork in the mail, like 1099s, be careful that you don't file too early. Even though 1099s should be in your mailbox by early February, sometimes there are stragglers. You don't want to file and then have a rogue 1099 show up in your mailbox. But you certainly want to pick a date with plenty of weeks to go before mid-April.

Why? So many reasons. If you owe money, you'll have more time to budget for whatever you have to send in, and if you're due a refund, you'll get it sooner. If something goes wrong in the tax planning, and you realize you're in over your head and need professional help, or you didn't collect all of your paperwork, you'll presumably have time to address it without having to ask for an extension. And the more time you have, the more time you have to spend working on your taxes. While that may be a pain, it will likely save you money in the long run.

For instance, Deborah Gregory says that if you're self-employed, you might want to "set up an employee pension plan and shelter the lesser of 25 percent of income, or $53,000 for 2015. This has to be set up before the filing deadline of April 18, 2016, so it's important to get your taxes done early to determine if this strategy makes sense."

Of course, if you're a true procrastinator, you didn't pick up on most of that. You simply read that last sentence as, "You have until April 18, three extra days past the usual April 15, to file your taxes."

Good luck.

You Can File Your Taxes Next Week—and Being an Early Bird is Smart

On the flip side, you have until April 18 to finish up this year if you needs lots of time.

The IRS will begin accepting 2015 federal income tax returns on Tuesday, January 19.

The agency expects to receive more than 150 million individual returns in 2016, with more than 80% filed electronically. But regardless of whether you plan on submitting online or on paper, the IRS says it will start processing all returns at the same time: “There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin,” the IRS noted in its statement.

And don’t think you’ve skipped the line if you’ve worked with a tax preparer already. Even if your return is ready, it can’t be submitted until the 19th.

 You may not be ready to file this early. But especially if you expect to get a refund, you should file as soon as you have all the necessary year-end statements. Those include your W-2 form from your employer, who has until the end of January to mail out a copy of this record of what you earned and paid in taxes, and 1099s from banks, brokerages or mutual fund companies. For maximum security, opt to e-file your return and have your refund directly deposited into the bank. The IRS says you can expect your refund within 21 days.


Finishing up early will significantly reduce your chances of having a fraudulent tax refund filed ahead of your own—and seeing your refund go to an identity thief. That delays the processing of your legitimate return and the payment of any refund.

For taxpayers who won’t be ready early, keep in mind that you have until April 18 to file a federal return or request an extension this year, an extra three days over the traditional April 15 deadline. The extension comes thanks to Emancipation Day celebrations happening in Washington, D.C. on April 15. If you reside in Maine or Massachusetts, you have until Tuesday, April 19 due to the Patriots Day holiday.

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.