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Moving Out of State? Learn All the Tax Implications First

 

With so many people working remotely these days, thinking about moving to another state has become common — perhaps for better weather or to be closer to family. Business owners might contemplate selling their business as part of an out-of-state move. Many retirees also consider moving to a state with a lower cost of living to stretch their retirement savings. Consider taxes before packing up your things if you're harboring such notions.

What Taxes Apply?

Moving to a state with no personal income tax may seem like a no-brainer, but you must consider all taxes that can potentially apply to state residents. In addition to income taxes, these may include property taxes, sales taxes, and estate or inheritance taxes.

If the states you're considering have an income tax, look at what types of income they tax. Some states, for example, don't tax wages but do tax interest and dividends. Some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

What Are the Domicile Requirements?

If you move permanently to a new state and want to escape taxes in the state you came from, it's crucial to establish a legal domicile in the new location. Generally, your domicile is a fixed and permanent home location 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 a domicile in the new state but didn't successfully terminate the domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, the old and new states may claim that your estate owes income taxes and any state estate tax due.

The first step to establishing domicile is to buy or lease a home in the new state and, generally, to sell your previous home (or rent it out at market rates to an unrelated party). Then, change your mailing address on bank and investment accounts, insurance policies and other essential documents. Getting a driver's license in the new state and registering your vehicle there also helps. So does registering to vote there and becoming involved with local organizations and activities. Take these and other steps as soon as possible after moving.

Remember that there may be rules about the number of days spent in the state. You may have to do more than take the steps above to show you're domiciled in the new state.

How Might State Taxes Affect a Business Sale?

Business owners tend to focus on the federal tax implications of a sale, while they may ignore state taxes. Now that federal tax rates are lower than they've been in the past, state taxes may take on added significance. Suppose you're contemplating relocating or retiring to another state. In that case, it may make sense to consider moving before you sell the business — especially if the new state has low, or even no, income tax.

To successfully negotiate the sale of a business, it's critical to understand all the tax implications. Armed with this knowledge, you can assess the impact of moving to another state on your net proceeds from the sale and whether it would be better to sell the business before or after you move.

Need Help?

When looking into whether the grass is greener in another state, research and contact the office for help, avoiding unpleasant tax surprises.

Mike Mead, EA, CTC
Alliance Financial & Income Tax 
807 NW Vesper Street
Blue Springs, MO. 64015 
P - 816-220-2001 x201  
F - 816-220-2012 
AFITOnline.com

Tax Implications to Be Aware of After a Job Loss

Despite the generally robust job market, some people are still losing their jobs. If you’re laid off or terminated from employment, taxes are probably the last thing on your mind. However, you may face tax implications due to your changed personal and professional circumstances. Depending on your situation, these can be complex and require you to make decisions that may affect your tax picture this year and in the future.

Unemployment and Severance Pay

Unemployment compensation, as are payments for any accumulated vacation or sick time, is taxable for federal tax purposes. Although severance pay is also taxable and subject to federal income tax withholding, some elements of a severance package may be specially treated. For example:

• If you sell stock acquired by way of an incentive stock option, part or all of your gain may be taxed at lower long-term capital gains rates rather than at ordinary income tax rates, depending on whether you meet a special dual holding period.
• If you received (or will receive) what’s commonly referred to as a “golden parachute payment,” you may be subject to an excise tax equal to 20% of the portion of the payment that’s treated as an “excess parachute payment” under complex rules. In addition, the excess parachute payment also is subject to ordinary income tax.
• The value of job placement assistance you receive from your former employer usually is tax-free. However, the assistance is taxable if you had a choice between receiving cash or outplacement help.

Health Insurance

Under the COBRA rules, employers offering group health coverage must provide continuation coverage to most terminated employees and their families. While the cost of COBRA coverage may be expensive, the cost of any premium you pay for insurance that covers medical care is a medical expense, which is deductible if you itemize deductions and to the extent that your total medical expenses exceed 7.5 percent of your adjusted gross income.

If your ex-employer pays for some of your medical coverage for a period of time following termination, you won't be taxed on the value of this benefit.

Retirement Plans

Employees whose employment is terminated may also need tax planning help to determine the best option for amounts they’ve accumulated in retirement plans sponsored by their former employers. For most employees, a tax-free rollover to an IRA is the best move if the terms of the plan allow a pre-retirement payout.

Suppose the distribution from the retirement plan includes employer securities in a lump sum. In that case, the distribution is taxed under the lump-sum rules except that “net unrealized appreciation” in the value of the stock isn’t taxed until the securities are sold or otherwise disposed of in a later transaction.

Suppose you’re under the age of 59½ and must make withdrawals from your company plan or IRA to supplement your income. In that case, there may be an additional 10% penalty tax (on top of an ordinary income tax due), unless you qualify for an exception.

Further, any loans you’ve taken from your employer’s retirement plan, such as a 401(k)-plan loan, may be required to be repaid immediately or within a specified period. If such a loan isn’t repaid, it may be treated as if the loan is in default. If the balance of the loan isn’t repaid within the required period, it typically will be treated as a taxable deemed distribution.

Next Steps

While taxes aren’t the most critical concern after a job loss, they are still important to consider. Contact the office for help charting the best tax course for you during this transition period.

MY BRUTALLY HONEST REVIEW OF 401(K) PLANS

 

Investment accounts like the 401(k) plan often take center stage when securing our financial future. But just like any financial tool, a spectrum of features can make them a hit or a miss for different individuals. In this brutally honest review, we'll delve into the pros and cons of 401(k) plans, highlighting their potential benefits and the pitfalls that might leave you rethinking your retirement strategy.

Pros: Ease of Investment, Tax Advantages, and Employer Match Programs

One of the most appealing aspects of a 401(k) plan is its ease of investment. You can contribute a portion of your income through automatic payroll deductions before seeing it. This "set it and forget it" approach allows your retirement savings to grow without constant intervention.

Beyond the convenience, 401(k) plans offer significant tax benefits. Contributions are made pre-tax, which means you reduce your taxable income by the amount you contribute. This lowers your current tax liability and allows your investments to grow tax-deferred until you withdraw the funds in retirement.

Employer match programs further heightened the allure of 401(k) plans. Many companies incentivize their employees to save for retirement by matching a percentage of their contributions. This essentially equates to "free money" that can significantly boost your retirement savings over the long term.

Cons: Limited Investment Options, Potential for Higher Fees, and Tax Risks

While 401(k) plans have their merits, they are not without their downsides. One notable drawback is the limited investment options they offer. Typically, these plans provide a selection of mutual funds and a few other investment choices. This lack of diversity could limit your ability to create a well-rounded and personalized investment portfolio.

Another concern is the potential for higher fees. Some 401(k) plans come with administrative and management fees that can affect your returns over time. While these fees may seem small initially, they can add up significantly over decades of saving and investing.

Tax implications also rear their head regarding 401(k) plans. While contributions are tax-deferred, withdrawals in retirement are subject to income tax. Additionally, if you need to make early withdrawals (before the age of 59½), you might face penalties and taxes on top of the regular income tax.

Furthermore, there's the looming tax risk. Tax rates could be substantially higher when you retire, potentially eroding the benefits of your pre-tax contributions. This uncertainty about future tax rates adds an element of unpredictability to your retirement planning.

My Take: A Balancing Act for Your Retirement Strategy

In conclusion, 401(k) plans can be pivotal in your retirement planning, especially if your employer offers a matching program. They provide an accessible and efficient way to save for your golden years while reducing your tax burden. The convenience and potential for employer contributions should be considered.

However, it's crucial to approach 401(k) plans with a balanced perspective. There might be better decisions than just relying on a 401(k) due to the limited investment options and the potential for higher fees. Diversification across various retirement accounts and investment vehicles can mitigate these limitations and create a more comprehensive financial strategy.

Furthermore, the tax implications and potential future tax rate uncertainties are important factors to consider. While the allure of tax-deferred growth is strong, it's essential to recognize that tax rates can change over time, potentially affecting the value of your investments.

401(k) plans should be considered a foundational piece of your retirement puzzle, not the sole solution. By understanding the benefits and drawbacks, you can make informed decisions about allocating your retirement savings to create a robust and adaptable financial plan.

Ready to build your free retirement plan? Book an appointment using the link below:

https://www.afitonline.com/appointments

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Is Your College Student's Scholarship Taxable?

May 1 is the traditional deadline for undergraduate students to commit to their college of choice, which means tuition payments are not far behind. If you are wondering if your child's scholarships are taxable, here is what you should know.

What Is a "Scholarship?"

First, it's important to understand how a scholarship is defined. Generally, a scholarship is an amount paid or allowed to a student at an educational institution for the purpose of study. It can include both merit and need-based institutional aid.

Other types of grants include need-based grants (such as Pell Grants or state grants) and Fulbright grants. A fellowship grant is generally an amount paid or allowed to an individual for study or research.

Fulbright grants may be either scholarship/fellowship income or compensation for personal services, which is usually considered wages. If you are a U.S. citizen recipient of a Fulbright grant, you must determine which income category your grant falls into to know how the grant is taxed for U.S. Federal Income tax purposes.

Tax-Free vs. Taxable

If your child receives a scholarship, a fellowship grant, or other grant, all or part of the amounts received may be tax-free if your child meets certain conditions.

Scholarships, fellowship grants, and other grants are tax-free if:

• The student is a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• The amounts the student receives are used to pay for tuition and fees required for enrollment or attendance at the educational institution or for fees, books, supplies, and equipment required for courses at the educational institution.

However, the student must include in gross income:

• Amounts used for incidental expenses, such as room and board, travel, student health insurance, and optional equipment.
• Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, students do not need to include in gross income any amounts received for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.

Reporting a Taxable Scholarship on Your Tax Return

Generally, a student reports any portion of a scholarship, a fellowship grant, or other grants that must be included in gross income as follows:

• If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the "Wages, salaries, tips" line of the student’s tax return. If the taxable amount was not reported on Form W-2, enter "SCH" along with the taxable amount in the space to the left of the "Wages, salaries, tips" line.
• If filing Form 1040-NR, report the taxable amount on the "Scholarship and fellowship grants" line.

Estimated Tax Payments May Be Due

If any part of a scholarship or fellowship grant is taxable, the student may have to make estimated tax payments on the additional income. For information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

If you have any questions about whether your college student's scholarships are taxable, please call.

 

Kids' Day Camp Expenses May Qualify for a Tax Credit

 

Day camps are common during school vacations and the summer months. And their cost may count towards the child and dependent care credit.

Here are five things parents should know:

1. Care for Qualifying Persons. You may qualify for the credit whether you pay for care at home, at a daycare facility, or a day camp. Your expenses must be for the care of one or more qualifying persons, such as your dependent child under age 13.

2. Work-Related Expense. In other words, you must be paying for the care so you can work or look for work.

3. Expense Limits. The total expense you can claim in a year is limited. The limit is generally $3,000 for one qualifying person or $6,000 for two or more.

4. Credit Amount. The credit is worth between 20 and 35 percent of your allowable expenses. The percentage depends on your income.

5. Excluded Care. Certain types of care don’t qualify for the credit, including:

• Overnight camps, Summer school tutoring,
• Care provided by your spouse or child under age 19 at the end of the year, and
• Care given by a person you can claim as your dependent.

Remember that this credit is not just a school vacation or summer tax benefit. You may be able to claim it at any time during the year for qualifying care. For more information, please call the office at 816-220-2001 or visit us online at www.AFITonline.com