The widespread adoption of remote work following the Covid pandemic has provided many, including the Harness Wealth team, with increased flexibility in terms of where they can reside and work. However, it is important to keep in mind that different states and territories have varying tax laws and some may be more favorable than others. So before you set off on your big move, consider the specific tax implications of doing so. Who knows, you might even find a more tax-friendly destination along the way.
In this article, we’ll dive into a number of topics that Harness Tax Advisors regularly go over with their clients, including:
- The nine US states (and one territory) with no income tax
- QSBS recognition for startup founders
- Estate taxes and how to minimize them
- Trust planning for the next generation
The nine US states (and one territory) with no income tax
As of 2023, there are nine US states that do not impose state income tax, and seven of these states also lack taxes on investment income, making them ideal locations for startup equity holders or crypto investors. However, it is important to remember that while residing in any of these states, individuals will still be obligated to pay federal taxes. Three states that are particularly popular for relocation, especially among those moving out of California or New York, are Washington, Texas, and Florida. All three of these states have no state income tax, no tax on unearned or investment income, and high quality of life that cater to a variety of different lifestyles from skiing to sunbathing. However, it’s important to note that while residing in any of these states, you will still be obligated to pay federal taxes.
Though not a state, Puerto Rico is another destination worth mentioning. The island territory has become a popular tax-driven relocation destination in recent years, particularly amongst crypto investors. The US territory offers attractive tax incentives on investment income through the Individual Investors Act. This act exempts individuals who transfer their primary residence to Puerto Rico from income tax on their passive income, which may consist of interest, dividends, and capital gains. However, it’s worth noting that Puerto Rico has its own progressive tax rates which may vary from the mainland US.
While living in any of these states (or territories) can save you money on taxes, it’s important to consider other factors such as cost of living, job opportunities, and quality of life before making a decision to relocate. Consult with a Harness Tax Advisor to best determine how state and local tax laws may impact your specific situation.
QSBS recognition for startup founders
If you’re a startup founder, one of the most important tax considerations for you will be Qualified Small Business Stock (“QSBS”) Recognition. QSBS is a federal tax benefit program that offers 100% exclusion of federal capital gains for a five-year period, up to $10 million for eligible stocks, such as Founders Stock. However, not all states conform to QSBS, and this can have a significant impact on taxes in the event of a liquidity event. Six states and territories (Alabama, California, Mississippi, New Jersey, Pennsylvania, and Puerto Rico) do not conform to the federal QSBS benefit, meaning Founders Stock holders should consider this when making decisions about where to reside to minimize their tax burden. For example, while New York does conform to QSBS, New Jersey does not. This is a particularly important example for those considering leaving New York City for the New Jersey suburbs, as, in a liquidity event, that move would end up costing you a lot in state taxes.
Estate taxes and how to minimize them
Estate taxes, also known as the death tax, is a federal tax that is applied to your assets that are transferred to your heirs or other willed beneficiaries upon your death. The tax rate varies based on the size of the estate, but there is a federal limit of $12 million for an individual and $24 million dollars for a couple. Estate tax should not be mistaken for inheritance tax, which is applied to the person who inherits the asset of the estate.
Ten states, as well as Washington, DC, impose an estate tax. Five states impose an inheritance tax. Maryland is the only state that imposes both estate and inheritance taxes. These state taxes range from 0.8% all the way up to 20%, and can apply to estates with assets as low as $1 million. Because of all this, strong estate planning can be a major tax saver down the line, and it’s important to pick a state that will do the least damage to your wallet. Washington, for example, which has no state income tax, does impose an estate tax of 10 to 20 percent on estates with assets of $2.2 million or more.
One of the best ways to minimize estate tax–or inheritance tax–is to establish a trust…
Trust planning for the next generation
When your personal assets become large enough that the focus shifts from a capital growth strategy to multigenerational wealth preservation, one of the first things you will likely do is establish a trust. Trusts are legal entities that allow multiple people (beneficiaries) to access the assets. They are especially useful structures for minimizing overall tax burdens that individuals would otherwise encounter in the transfer of assets from one generation to the next. But trusts are very expensive to set up, often exceeding $10,000, and have administrative fees that can hover around 1% of the total managed value per year.
And you guessed it: some states are better than others for trusts. A popular strategy often used by Harness Tax Advisors is to establish your trust in South Dakota, as there will be no state taxes, no limit on how many years your trust may exist, strong asset protection provisions, and flexible decanting rules for when you need to modify the assets of your trust.
Let a Harness Tax Advisor help you decide
Changing state residency is not a flip-of-a-switch decision. It’s important to give careful consideration to your current and recent work and personal needs, as well as any major financial decisions that may be on the horizon. And while you should always prioritize moving to a place that will make you happy, exploring the most financially-beneficial options may lead to the best overall outcome. To explore the residency options that make the most sense for your specific needs, and reach an informed decision, consider working with a Harness Tax Advisor today.