Tax Considerations When Retiring In Another State

Moving to another state is a key part of many peoples’ retirement plans. However, not everyone takes in to account all of the tax considerations when retiring in another state.

Some couples want to enjoy better weather so they can participate in more outdoor activities, such as those living up north who decide to relocate to Florida or Arizona. Others want to be closer to family members who may live far away.

Some retirees decide to move to lower their tax burden. There are seven states where individual income is not subject to state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And New Hampshire and Tennessee only assess state taxes on dividends and interest.

Identify All Applicable Taxes

It might seem like a no-brainer to simply move to a state with no personal income tax. To ensure you make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If you’re considering moving to a state that does not have personal income tax, look closely at what types of income are taxed. Some states don’t tax wages but do tax interest and dividends, as noted above. And some states offer tax breaks for pension income and retirement plan and Social Security distributions.

For example, distributions from 401(k)s, IRAs and pensions are exempt from state tax in Illinois, Mississippi and Pennsylvania. However pension, but not 401(k) or IRA, income, is exempt from state tax in Alabama and Hawaii.

Watch Out For State Estate Tax

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy additional estate taxes with a much lower exemption. Some may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish Domicile In Your New State

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes state income taxes and any applicable state estate tax.

The more time that elapses after you move to a new state and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state include:

  • Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party).
  • Change your mailing address at the post office.
  • Change your address on passports, insurance policies, your will or living trust and other important documents.
  • Register to vote, get a driver’s license and register your vehicle in the new state.
  • Open and use bank accounts in the new state and close accounts in the old one.

Also, if an income tax return is required in the new state, file a resident return and file a nonresident return or no return (whichever is appropriate) in your old state. We can help with these returns.

Make an Informed Choice

Before deciding where you want to live in retirement, do your research and contact your tax professional. We can help you better understand the tax considerations when retiring in another state. This will allow you to avoid unpleasant tax surprises that could be very costly.

Sales and Use Tax For Online Sellers After the Wayfair Case

It has been nearly three years since the U.S. Supreme Court decision was handed down that changed sales and use tax rules for online sellers. Known as South Dakota v. Wayfair, Inc., or simply as the Wayfair case, the ruling removed the physical presence requirement for sales tax nexus.

As a result, states can now require businesses to collect sales tax on goods and services sold in the state even if the business has no physical presence in the state. The ruling primarily affects online businesses and companies that sell via mail or telephone order (sometimes referred to as MOTO businesses).

Surprisingly, many companies have yet to adapt to the ruling. Often companies have heard of Wayfair but haven’t done anything about it.

Here are some of the most common questions clients have about how they can keep up with their sales and use tax obligations.

How does a company know where to file sales and use tax?

To know if it has a filing responsibility, a company needs to understand state law and how it applies to the company’s activities in the state.

Wayfair expanded states’ ability to require out-of-state companies to collect the state’s sales tax. Now, states can require out-of-state companies to collect the state’s sales tax if the company has sufficient “economic presence” in the state.

The most common economic threshold for a sales tax requirement is $100,000 in sales or 200 transactions in a state. The traditional parameters, however, such as whether a company has an employee presence or physical locations in the state, still apply. Complicating the situation, each state has its own parameters for determining when sales and use tax needs to be collected.

How can companies be sure they’re calculating sales and use tax correctly?

Calculating sales and use tax requires an analysis of state law and an understanding of the state’s sourcing rules. Depending on the state, some transactions are taxed all the time while some are circumstantially exempt.

Typically, a state will source a sale to the jurisdiction where the good is sold or delivered. Identifying that particular jurisdiction, however, can be tricky. Most states have a tax rate lookup system that enables companies to search for the correct jurisdiction and rate. However, it can be daunting when a company has thousands of customers with different addresses. Complete accuracy would require a check of every single transaction.

Alternatively, a company can invest in sales tax automation software. Whether that software produces the correct result depends on whether the correct information was input at the start.

What are the greatest challenges for companies that want to handle sales and use tax compliance in-house?

These companies face three main challenges: personnel, cost and risk. Calculating sales tax in-house requires at least one individual who is more than just knowledgeable about sales taxes. Companies that invest in such a person risk that person moving on and taking their knowledge with them. Also, calculating sales tax isn’t really a full-time job. Returns are typically due around the 20th of the month, so there’s a lot of downtime for an inhouse sales tax expert.

In addition, compliance and research software costs may be associated with handling sales and use tax in-house. Finally, if the person handling sales tax doesn’t rise to the expert level, there’s increased risk that the decisions made will turn out to be incorrect. This may lead to taxes, penalties and interest upon audit.

What tools can companies use to help with sales and use tax compliance?

Software can help, but the more complicated the software, the more expensive it gets. Also, software needs to be set up correctly and checked often to ensure its accuracy. This requires an expert.

Another option is to outsource the function or employ a hybrid solution. For example, a company could work with a sales tax expert on a quarterly basis to make sure filings are occurring in the right states, tax is being charged when it should be, and tax is being calculated correctly and for the right jurisdiction.

Although sales tax is often the smallest item on the invoice, companies should take it seriously. States will be motivated to go after out-of-state companies that haven’t been filing when they should have.

Contact us if you’d like assistance getting a handle on your sales and use tax obligations.

Succession Planning Strategies: 5 Questions to Ask Before Selling Your Business

1. What Are Your Post-Business Ownership Plans?

How much thought have you given to what you’re going to do after you sell your business? Maybe you plan to retire and take it easy for a while. If so, you should work closely with a professional wealth advisor to develop a detailed retirement financial plan to help ensure that you have sufficient resources to support your desired retirement lifestyle.

Or maybe you want to start another company after you sell your existing business. In this case, you’ll want to make sure that the proceeds from the sale of your business are sufficient to launch your new venture.

2. To Whom Will You Sell The Business?

Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team. In this case, the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). Or it could be family members if yours is a family-run business.

There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high growth potential. This way, in the future, they can sell your company at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own, such as a competitor. This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.

3. How Can You Add Value To The Business Before Putting It On The Market?

The best way to boost the eventual sale price of your business is to focus on key business value drivers today. These are things you can do now to make your business more valuable in the eyes of buyers while reducing potential risks.

For example, are your corporate records, contracts and other legal documents all current and in good standing? Are your financial statements accurate and current and is your technology up to date? Have you developed a seasoned and experienced management team that’s prepared, and financially incentivized, to help ensure a smooth transition to new ownership? Most importantly, is there a realistic business growth plan in place that will enable buyers to realize positive ROI on their investment?

4. How Much Is Your Business Worth?

This is the proverbial $64,000 question. Many owners think they have a good idea of what their business is worth based on their gut instinct. But this value often isn’t realistic. Most owners have an emotional connection to their business and tend to over-value the sweat equity they’ve put into building it.

Buyers will look at your business from a purely numbers and analytical approach. The main thing they’re looking at is the quality of business earnings and how repeatable these earnings are in the future. It might make sense to engage a valuation professional to conduct a quality of earnings study to estimate the future cash flow potential of the business and come up with at least a rough business valuation.

5. Who Will Form Your Business Advisory Team?

Selling a business is a lengthy and complex process that requires high-level expertise. You should begin forming a business advisory team that includes the following:

  • An investment banking firm to market your business.
  • A valuation professional to help you gauge business value and determine the selling price.
  • An experienced M&A attorney.
  • A Tax advisor
  • who specializes in the sale of closely held businesses.

Even if you’re not planning to sell anytime soon, it’s still smart to go ahead and start the succession planning for your business now. This way, you’ll be ahead of the game when you’re ready to exit the business one day down the road.