Wealthy investors' state of residence can affect their tax bills in myriad other ways. Two of the most significant have to do with large taxable events such as the sale of a business or retirement. States treat capital gains on the sale of a business as ordinary income. People who sell "a business in Oregon for a gain of $10 million will pay $1 million dollars more in taxes than if they went across the border to sell in Washington, which has no income tax," says Gannon. Meanwhile, 19 states have their own unique estate taxes.
Some investors try to relocate to a zero-tax state to avoid a big tax hit. In fact, many retirees move to states such as Florida prior to withdrawing money from their 401(k)s and being taxed at New York or California rates. But "if you move out of a high-tax state, sometimes the tax laws of the state follow you, and you could wind up in court if you try to avoid paying the tax," warns Thomas Muldowney, managing director of Savant Capital Management, a wealth management company in Rockford, Ill. "Laws vary by state, but typically you have to maintain your new state of residence for three to five years for your previous state's tax laws not to have any impact."
Muldowney is quick to point out that income taxes are only part of the state tax equation. There are also property taxes, sales taxes, estate, business, and corporate taxes. One survey of state tax rates by the Tax Foundation, a Washington think tank, ranks states by their total overall taxes as a percentage of per capita income. In the latest ranking, New Jersey was the highest tax state, collecting 11.8% of its citizens' per capita income in taxes while the average state collected 9.7%. For investors in the top bracket, the numbers would be higher. "If all you wanted was the lowest tax drag, you'd probably move to Alaska, which has an average tax burden of 6.4%," says Muldowney. While his is not a view universally held, he cites "one drawback" to that plan: "It's Alaska."
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Stocks Vs Bonds - Tax Strategies
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