Last updated on November 8, 2019 at 11:16 am
Moving to no-tax states may sound like a huge financial advantage, but you need to recognize that you will probably face other, higher-than-normal tax rates. It’s important to dig a little deeper into what “no-tax” really means.
There are several states that currently do not impose income tax on their residents, including Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In Tennessee and New Hampshire, individuals pay income tax only on dividends and income from investments. However, these states still need to generate revenue to pay for parks, highways, bridges, schools and all the other state-supported programs.
The answer is typically to tax other items rather than income. Food, apparel and gasoline are often the first targets. For example, Tennessee has the highest sales tax in the country and New Hampshire homeowners pay some of the highest effective property taxes in the country, according to RealtyTrac. In Washington, the prices at the pump are typically among the nation’s highest.
If you’re still considering heading for a no-income tax state, there are still a number of significant factors to consider. Here’s what matters:
The Timing of Your Move
If you’re planning to move just before selling your business or receiving a large settlement check, do not assume your move will circumvent taxes owed. The amount of time you have spent in your new state, combined with substantial connections in a previous state, will raise a red flag and create suspicions about your move. You may actually have to pay some tax to the state you are leaving.
The Location of Your Principle Residence and Your Family
The tax authorities may not consider you a resident just because you spend time in your newly adopted state. They will examine how much time you are in your former state – and that should be less than 183 days a year to be viewed as a non-resident.
Your Driver’s License and Where Your Vehicles Are Registered Matters
To help your case that you’re resident of a new state, you will need to quickly change your driver’s license and car registration. If you don’t, your claim to residency may be deemed suspicious.
The Location of Your Doctors, Accountants, Attorneys and other Advisers
As you seek to substantiate your residence status in a new state, you will need to show that you are consistently interacting in a meaningful way with professionals in the new state.
The reality is that anyone leaving one state for another as a tax strategy will need to demonstrate that they have made a legitimate move and settled into a new state. This means you bank primarily in the new state, you vote there, you are a part of the religious, professional, social and civic community there and your homeowner’s property exemption or other formal documents, such as your federal income tax forms, are filed there.
Leaving a state that has high income taxes can be a smart move – and with good advice, a solid plan and a thorough approach – you can come out ahead. But you have to be aware that the states are becoming more vigilant and skeptical of moves. The higher the stakes, the more doubtful they might be of your intentions.
If a move to a new state that is income tax free is on your horizon you could still be vulnerable to paying tax in the state you’ve left. Be sure to consult with your tax accountant before making any changes.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance in New Jersey.
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