Tax State Residency and No Income Tax States – PillarWM
Determining your tax state residency can help you avoid dual taxation, thereby protecting your wealth. Securing your assets should be your priority, which is why you need to hire a professional who is well-equipped to manage your finances. Our Ultimate Guide is designed particularly for investors with over 10 million dollars in liquid assets to find the best advisor.
For a more professional and customized experience, you can contact us at Pillar Wealth Management. We work with investors who have a liquid net worth of 5 million to 500 million dollars, using innovative strategies to create comprehensive financial plans that help them reach their goals.
In this article, we will help you answer questions such as:
• What are state taxes, and how do they work?
• Do I have to pay state taxes if I’m not a resident?
• What determines the state of residence for tax purposes?
• Which states have no state tax?
• Why do investors move to a no income tax state?
How Do State Taxes Work?
Each state has its own tax laws and criteria for residency. In most states, the individual income tax is based similar to that of federal taxes. They can begin with your federal adjusted gross income or with our federal taxable income.
Depending on the state laws, you can be taxed on securities issued from other states, or you might be liable for a full or partial pension income tax exemption. Each state can also have its own tax bracket or tax a single rate on all income. Taxes can also be imposed on your capital gains, while many states offer exemptions and deductions to certain people, such as students or people with lifelong medical expenses.
A state income tax applies in the state where you earn your income, not where you reside. However, some domicile states impose income tax even if you work in another state. If you’re not careful, you could end up incurring dual taxation, costing you more of your wealth than you like.
We understand that you want to secure and retain your wealth. While one way to do this is by reducing how much you lose to taxes and unnecessary costs, another is to maximize your portfolio growth. You can read more about that in our guide,5 Critical Shifts For Maximizing Portfolio Growth Strategies – For Families Worth $5 Million To $500 Million.
What Is Meant by Tax State Residency?
Tax state residency is defined by a state based on your domicile state. Your domicile state is that which you intend to be your permanent home and where you plan on returning to whenever traveling. A domicile is independent of citizenship, meaning that if you move to another country, you will not have changed your domicile unless it is proven that you plan to remain in a foreign country permanently.
The law allows a person to have one domicile at a time. If you acquire another domicile, you become a non-resident of the previous state. This may lead you to wonder, “Do I have to pay state taxes if I’m not a resident?”
If you don’t live or work in a state, you are classified as a non-resident, and if you don’t have any income generating activity based in that state, you don’t have to pay taxes. However, in some cases, you can become trapped in the complications of dual residency and dual taxation.
Normally, this occurs when retirees have a second home in another state, people who live in one state but have business in another, people who relocate but return to their domicile after a few years, and people who temporarily relocate to another state or country for a job. If you fail to establish a domicile in another state, you might find yourself being taxed in more than one state.
Taxes can leave a big dent in the wealth of high net worth or ultra-high net worth individuals, making it necessary for you to consider tax avoidance strategies. At Pillar Wealth Management, we have helped affluent clients manage and lower their taxes for decades. If you would like to learn how we can help you with your wealth management, feel free to contact us for a free consultation.
What Determines Your Residency?
If you move to a new state, it is best to establish a legal domicile or residency in that state to avoid paying taxes in the state you left. Again, this gets complicated since each state has its own criteria to determine your residency. Hence, we advise that you consult with a professional advisor about tax state residency before making any big, permanent decisions. Our guide, The Ultimate Guide to Choosing the Best Financial Advisor for Families worth $5 Million to $500 Million, can help you identify positive traits that you should look for in any advisor.
The question on your mind should be, “What determines the state of residence for tax purposes?” There are few actions that can help taxpayers establish residency in a new state, for example:
• You should change your mailing address and the address on legal documents such as passports, living trusts, or insurance policies.
• You can look for a residence in your new state, either to buy or rent, and sell your property in the previous state.
• You can keep track of how many days you spend in the new state versus the old state. You need to spend the majority of your year in your new state to establish residency.
• You can get a driver’s license or register your vehicle in the new state.
• You can open active bank accounts in your new state, closing any accounts in the previous one.
• You can register to vote in your new state.
• For efficiency, you can file a resident income tax return in the state where you moved while filing a nonresident return in your old state.
Once you establish your residency, it will be difficult for your old state to claim you as a resident for tax purposes. If you would like more clarification on how taxes can affect your wealth, we advise that you consult with a professional. Our wealth managers are ready to help you with state-of-the-art tax management strategies. Call us to schedule your first meeting!
No Income Tax States and How They Can Help You with Tax Mitigation
We recognize that wealthy investors have different requirements and need a comprehensive financial plan that allows them to enhance and secure their wealth.We discuss this in detail in our book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million.
We help our clients minimize risk and save their income by implementing strategies to cut down their taxes and unnecessary costs. One of these strategies is to move to a no income tax state. This raises the question, “Which states have no state tax?” Namely, the following nine states do not impose income taxes:
• New Hampshire
• South Dakota
It is best to remember that although New Hampshire and Tennessee do not charge income taxes, they do charge taxes on interests and dividends. Therefore, yourtax state residency can be avoided if you move to one of these states.
How Does This Help?
Since wealthy investors enter a high tax bracket due to their large incomes, they can lose a lot of their profits to taxes. Moving to a state with no income tax allows them to retain that wealth and the returns that they generate from their investments.
High tax rates also have a way of affecting your portfolio performance. Therefore, changing your tax state residency can improve your portfolio performance. We discuss more strategies in our guide, Improving Portfolio Performance: The Shifts Multi-Millionaires Must Make to Achieve Financial Security and Serenity.
No income tax states cap their tax deductions at a set limit of 10,000 dollars, which allows you to get your income at the state level. Paired with the better economic opportunities in these states, you can grow your business and earn more profits at a faster rate. Lower costs of living and lower commercial property rates in these states also allow you to save more of your wealth or invest it in real estate for a larger profit margin.
For retirees, relocating to a state with no income tax is ideal since their savings are no longer being depleted in paying off taxes each year. Moreover, these states don’t tax your investment income, which is primarily the main income source for retired investors.
Is There Any Risk Associated with Moving to a State with No Income Tax?
Once you know which states have no state tax, you should also look at the negative aspects of moving to those states. Changing your tax state residency to a state with no income tax might save you from having to pay tax on your income and profits, but some states collect these taxes through other means.
They maintain their tax revenue stream by charging you taxes on other aspects, for example, sales tax or higher property taxes. This could end up negating any amount of money you could have saved from not paying income taxes.
Secondly, if you reside in a high tax state, it is harder to relocate to a no income tax state, especially if your net worth is north of millions of dollars. Establishing your residency in a new state can take a very long time if the case of your residency status reaches the court.
Lastly, if you have a business or an activity that generates income in a high tax state, you will still be liable to pay income taxes in that state. If all of this sounds too complicated to you, it is best to remember that there are other methods and strategies that can help you mitigate your taxes legally. A good financial advisor can help investors with a net worth of more than 10 million dollars retain their money. If you want help in your search for the best high net worth financial advisor, you can read our exclusive Ultimate Guide.
Changing your residency status for tax purposes can be a complex process because of all the factors you need to consider. According to your unique financial profile and goals, relocating might not be the best option for you. A financial professional can offer you the best advice on this matter while informing you of important matters such as which states have no state tax and what determines the state of residence for tax purposes.
Tax state residency and relocating are only some of the many strategies that wealth managers use to help their clients with their tax management. At Pillar Wealth Management, we work with clients who have a liquid net worth of 5 million to 500 million dollars. We aim to provide you with financial security and serenity by crafting customized solutions and financial plans designed to help you reach your goals. Book a meeting with our team to get in touch with us. We can help you with your risk management, investment management, retirement planning, tax management, and more.
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