Consider state tax in retirement

When you retire, you may consider moving to another state — say, for the weather or to be closer to loved ones. State taxes also may factor into the equation. Here’s what you need to know about establishing residency for state tax purposes — and why the process may be more complicated than it initially appears to be.

Identify and Quantify All Applicable Taxes

It may seem like a no-brainer to simply move to a state that has no personal income tax, such as Nevada, Texas or Florida. But, to make a good decision, you must consider all of the taxes that can potentially apply to a state resident, including:
•Income taxes,

•Property taxes,

•Sales taxes, and

•Estate taxes.

For example, suppose you’ve narrowed your decision down to two states: Texas and Colorado. Texas currently has no individual income tax, and Colorado has a flat 4.63% individual income tax rate. At first glance, Texas might appear to be much less expensive from a state tax perspective. Not necessarily. The average property tax rate in Texas is 1.93% of assessed value, while in Colorado it’s only 0.62%.

Within the city limits of Dallas, the property tax rate is a whopping 5.44%. So, a home that’s assessed at $500,000 would incur an annual property tax bill of $27,200 if it’s located in Dallas, compared to only $3,100 in Colorado. That difference could potentially cancel out any savings in state income taxes between those two states, depending on your income level.

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

Watch Out for State Estate Tax

Not all states have estate tax, but they can be expensive in states that do. Every dollar you pay in state estate tax is in addition to any federal estate tax owed, except for the federal estate tax savings from the state estate tax deduction. Currently, estate taxes are levied in:








•New York,


•Rhode Island,



•Washington, and

• Washington, D.C.

Beware — the federal estate tax exemption is $5.49 million in 2017. But some states haven’t kept pace with the federal level and, instead, levy estate tax with a much lower exemption. Also note that some states may levy an inheritance tax in addition to (or in lieu of) an estate tax.
Establish Domicile

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 state. The exact 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.

Because each state has its own rules regarding domicile, you could wind up in the 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 state. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state estate tax.

How do you establish domicile in your new state? The more time that elapses after you change states 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 the new state:
•Buy or lease a home in the new state.

•Sell your home in the old state or rent it out at market rates to an unrelated party.

•Change your mailing address with the U.S. Postal Service.

•Change your address on passports, insurance policies, will or living trust documents, and other important documents.

•Get a driver’s license and register your vehicle in the new state.

•Register to vote in the new state. (This can probably be done in conjunction with getting a driver’s license.)

•Open and use bank accounts in the new state.

•Close bank accounts in the old state.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. Your tax advisor can help with these returns.

Make an Informed Choice

Before deciding where you want to live in retirement, do some research and contact a tax professional in the new state that you’re considering. Taking these steps could avoid making a bad relocation decision when taxes are considered — one that could be difficult and expensive to unwind.

Avoid Refund Delays!

Many people dread tax time, but it can be even more frustrating if you have to wait longer than you’d hoped for your refund. Unfortunately, the Internal Revenue Service is warning that patience may be necessary this year. For one thing, identity theft and tax refund scams have become significant concerns, so the Service is taking extra measures to spot fraudulent returns. The IRS is also required to hold refunds for returns claiming the Earned Income Tax Credit and the Additional Child Tax Credit until mid-February.

You can help prevent any additional delays by ensuring that you’re ready with all the necessary documents to file your return, including Forms W-2 and 1099 reporting your income, and all the required receipts and other paperwork to ensure you qualify for your deductions or credits. Contact our office today with any concerns you may have about preparing to file your return. We can offer personalized answers to all your financial questions.

Documenting Your Charitable Donations

Many people make donations to charities whose work they support, but if you are planning to take a tax deduction for your gift, you must have the proper paperwork. Assembling the right documentation can also be tricky because the requirements vary based on whether the donation is cash and on the value of your gift. If you donate less than $250 in cash, for example, a canceled check, credit card statement or similar record may be sufficient, but if you give more, you will need a written acknowledgement from the charity. An additional tax form—and possibly an appraisal—may be needed for non-cash donations, depending on their value. Of course, the organization itself must also qualify as a charity under IRS rules. Be sure to contact us with all of your questions on charitable giving or any other financial concern.

2016 Tax Filing Deadlines

For tax year 2016, the IRS adjusted several due dates for the filing of tax returns and foreign account reporting.

  • The due date (without extension) for filing a C corporation tax return will be three-and-a-half months after the close of the tax year (April 15 for calendar-year tax years).
  • The due date (without extension) for filing a partnership tax return will be two-and-a-half months after the close of the entity’s tax year (March 15 for calendar-year tax years).
  • The due date (without extension) for filing a S corporation tax return will be two-and-a-half months after the close of the entity’s tax year (March 15 for calendar-year tax years).
  • The due date for filing a trust tax return (Form 1041) having a calendar year will be April 15.
  • The due date for filing a trust tax return (Form 1041) with a non-calendar year will be three-and-a-half months after the close of the tax year.
  • The due date for filing the FinCEN Foreign Bank Account Reporting (FBAR) will be April 15.

As a general rule, the new filing dates are effective for tax returns filed beginning January 1, 2016. The exception to this rule is for C corporations with tax years ending on June 30. For those C corporations, the current due date (without extension) will remain September 15 until after 2025.




Beware of Tax Scams!

Did you know that con artists posing as Internal Revenue Service representatives frequently try to scam people out of their money? While this is a long-standing problem, the IRS has issued a new warning against thieves who may contact people on the phone or via email or a letter and try to trick them into divulging personal financial information, such as their Social Security or bank account numbers, or sending cash. And the scams can be tough to spot. Potential victims may see a fake caller ID that identifies the call as coming from the IRS or receive mail or email that appears to have the IRS letterhead or one like this that resembles the IRS website. The scammers typically try to intimidate victims into acting quickly—by, say, sending a payment to what they claim is an IRS address—by threatening arrest or some other consequence.

If you receive an IRS communication that seems suspicious or doesn’t make sense, please call our office. Whether you are facing a legitimate tax issue or a scam, we can help you sort through the details and determine how to respond. You can report incidents to the Treasury Inspector General for Tax Administration at 800-366-4484 or online. Remember, too, that the IRS website is, so be on alert if you’re directed to another similar site that ends in .com or .net instead of .gov.

IRS Renews Warning about Form W-2 Scam

The IRS has renewed its warning about an email scam that targets payroll and human resources departments. The scam involves a phishing email that solicits sensitive employee information such as social security numbers and copies of Form W-2 and has expanded to include school districts, tribal organizations, and nonprofit groups. In addition, cybercriminals are now following up with an apparent executive email to the payroll department or controller asking that a wire transfer be made to a certain account. The IRS encourages all organizations to create an internal policy on the distribution of employee W-2 information. Organizations receiving the phishing email should forward it to . News Release IR 2017-1 and 2017-20.

Tax reform included in Kasich’s Budget Proposal

Click here to read the Kasich Administration’s summary of the budget bill package released on January 30th, 2017.

A summary of the tax provisions are outlined below.

  • The initial proposals in Gov. Kasich’s package most directly impacting Ohio businesses include:
    • Centralizing municipal net profits tax filings and payments through the Ohio Business Gateway versus the current process of filing directly with each Ohio city or village or its designated agency. The governor proposes one filing form, one uniform administration and appeals process through the Ohio Department of Taxation, and that information would be uploaded from commercial software packages. Individual municipalities would continue to set rates and determine tax credits, administer employer withholding and deal with individual filers.
    • The throwback rule used by a number of Ohio municipalities would be eliminated.
    • No increase in the Commercial Activity Tax rate for Ohio businesses. Suppliers to Qualified Distribution Centers (QDCs) would pay 10% of gross receipts on goods delivered to QDCs.
    • Reducing the personal income tax rate by an additional 17%, taking the top rate down to 4.33%. Of concern is that this decrease largely will be paid for by increasing another tax: the state sales tax rate will increase to 6.25% from 5.75%.
    • The proposal to expand the sales tax base to a limited number of services such as lobbying, cable TV, certain cosmetic surgeries, and others.
    • Shrinking the number of income tax brackets from 9 to 5.
    • Equalizing the tax on cigarettes to include other tobacco products.

Obamacare (And Net Investment Income Tax) Repeal

On January 4th, the United States Senate voted 51-48 on a motion to move forward with a budget resolution which instructs the authorizing committees to submit legislation.  Included in the measure was a reconciliation instruction that would allow most of the Affordable Care Act to be repealed on a simple majority vote in the Senate instead of the typical 60 vote majority.  Democrats used the budget reconciliation process in 2010 to pass large parts of Obamacare to avoid a Republican filibuster, however, there may be other parts of the law that cannot be repealed under the budget reconciliation process.  President Obama made an appearance on Capitol Hill on the same day to meet with Democrats from both chambers and instructed them to not assist Republicans to develop a new healthcare law.  Thus, it is unclear what will happen to the parts of Obamacare that were passed with a 60 vote Senate majority in 2010 since Senate Democrats are unlikely to cooperate with Republicans in drafting replacement legislation.

Included in the 2010 reconciliation process was the 3.8% Medicare tax on net investment income (unearned income of individuals, estates and trusts) to help subsidize the health care law. Beginning with tax year 2013, Married couples filing a joint return with modified adjusted gross income (MAGI) in excess of $250,000 and single taxpayers with MAGI in excess of $200,000 have been subject to the additional 3.8% tax.  For example, a married couple with wages of $225,000 and investment income (interest, dividends, capital gains, etc.) of $125,000 currently owe an additional $3,800 ($225,000 + $125,000 – $250,000 x 3.8%) in taxes when filing their individual income tax return.  Conversely, a single taxpayer would owe $4,750 with the same facts (MAGI is greater than $200,000 before factoring in any investment income therefore the entire $125,000 is subject to the 3.8% tax).  It is expected that this tax will be repealed as part of the health care overhaul in what will likely be one of several reforms to the tax code under a Trump administration.

Upcoming Changes to Not-for-Profit Accounting

In August of 2016, after receiving over 250 comment letters since its exposure draft from preparers, auditors and other users abroad, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-14 – Not-for-Profit Entities (Top 958): Presentation of Financial Statements of Not-for-Profit Entities (ASU 2016-14).  The overall goal of the update was to enable Not-for-Profit’s (NFP’s) to better “tell their financial story”.  While this update is not considered to be an overhaul of the current model, ASU 2016-14 will be the most significant update to NFP financial reporting in years.

The key provisions of ASU 2016-14 are as follows:

  • Net Asset Classes
  • Liquidity and Availability
  • Expense Reporting
  • Investment Return
  • Statement of Cash Flows

Net Asset Classes

Under the current model, there are three types of net asset classes: unrestricted net assets, temporarily restricted net assets and permanently restricted net assets. These three classifications were confusing to many readers as the term “unrestricted net assets” was misunderstood.  Therefore, the new presentation will combine net assets into two classes: net assets without donor restrictions and net assets with donor restrictions.  Note that NFP’s will still be required to disclose donor/grantor-imposed restrictions, including how and when the resources may be used.

Liquidity and Availability

One of the more interesting provisions to ASU 2016-14 (interesting in the fact that it would be specific to NFP’s only) is the requirement to disclose qualitative and quantitative liquidity information. Specifically, information regarding how a NFP manages its available liquid resources and the availability of financial assets at the balance sheet date to meet upcoming cash needs (within 1 year).

A unique aspect of NFP financial reporting when compared to other types of industries is the requirement to show donor restrictions to its net assets. While this may be beneficial and informative, it can also mask the liquidity of an otherwise healthy balance sheet.  For example, if an NFP were to have $25 million in cash, $50 million in PP&E, no debt and very few payables and accruals, this would indicate a very healthy balance sheet, right?  However, what if that same NFP had a $20 million donor-imposed restriction on its cash and anticipated a $10 million loss in the next year?  Would the NFP be able to meet its cash needs for general expenditures within 1 year?  Probably not.  These types of scenarios have occurred frequently and are the reason for the liquidity and availability disclosure as part of ASU 2016-14.  To see an example of this disclosure click here.

Expense Reporting

The new requirements for expense reporting will require all NFP entities to present their expenses either on the face of the financial statements or in the disclosure notes by function and natural classification.  Previously, this was only a requirement for voluntary health and welfare entities but now will affect all NFP’s (i.e. private foundations).  The ASU also provides enhanced guidance on allocations from management and general expenses regarding activities that represent direct conduct or direct supervision.

Investment Return

Currently, NFP’s are required to disclose gross investment income and expense. Under ASU 2016-14, NFP’s are now permitted (but not required) to net investment expenses against investment return on the face of the statement of activities.  This provision is the only update in ASU 2016-14 that was made in an effort to simplify NFP financial reporting.  Note that this does not apply to programmatic investing activities (i.e. NFP’s that are in the business of making affordable loans to low-income families).

Statement of Cash Flows

The hottest topic under discussion from the FASB’s exposure draft was the potential measure to require NFP’s to present their statement of cash flows (SCF) using only the direct method. Those for the measure argued that the indirect method was confusing to readers whereas those against the measure argued that the SCF was not useful as part of the financial statements in general and that the direct method would be too cumbersome to produce.  This was also evidenced at the AICPA’s most recent Governmental and Not-for-Profit Training Program in Las Vegas, where in a room full of 200+ CPA’s, when asked how many in the audience prepared the SCF using the direct method, two hands went up.

Fortunately, the FASB decided to leave this one alone (for the most part) and both the indirect and direct methods are still allowed under ASU-2016-14. The only change related to the SCF under ASU 2016-14 is for those few NFP’s that report the SFC using the direct method; they are no longer required to show the indirect reconciliation in the notes to the financial statements.

ASU 2016-14 is effective for fiscal years beginning after December 15, 2017 (calendar year 2018 and fiscal year 2018-2019) with early adoption permitted. Also, it is important to note that all of the amendments must be incorporated in the year of adoption.  ASU 2016-14 is considered to be Phase I of a two part deliberations plan.  Phase II is expected to be released for discussion soon and includes projects for further consideration including the statement of cash flows, expense reporting, and other various operating measures.

The full version of ASU 2016-14 can be accessed through the FASB website here.

If you have any questions regarding the FASB ASU 2016-14 update, please contact Chris Soderberg at ARM.

Trump’s Tax Plan

Beginning Jan. 20, 2017, the Republican Party will be in control of both houses of the U.S. Congress as well as the Presidency. On November 9, the day after the election, House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Majority Leader Mitch McConnell (R-KY) indicated that they want to take up tax reform early in the next session of Congress. Here we present some of the recent tax proposals from both President-elect Donald Trump and House Republicans.

President-elect Trump’s proposals. As of Nov. 10, 2016, President-elect Trump’s Tax Plan website lists the following proposals:

For individual taxpayers:

…Tax rates and breakpoints for Married-Joint filers would be:

  • Less than $75,000: 12%
  • More than $75,000 but less than $225,000: 25%
  • More than $225,000: 33%;

…Brackets for single filers would be ½ of these amounts;

…“Low-income Americans [would] have an effective income tax rate of 0”;

…The existing capital gains rate structure (maximum rate of 20%) would be maintained, with tax brackets shown above;

…Carried interest would be taxed as ordinary income;

…The Affordable Care Act would be repealed; as part of this repeal, the 3.8% tax on investment income would be repealed;

…The alternative minimum tax (AMT) would be repealed;

…The standard deduction for joint filers would increase to $30,000, and the standard deduction for single filers would be $15,000;

…Personal exemptions would be eliminated;

…Head-of-household filing status would be eliminated;

…Itemized deductions would be capped at $200,000 for Married-Joint filers and $100,000 for Single filers;

…The estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax, with an exemption for small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives would be disallowed;

…There would be the following child care and elder care rules:

  • An above-the-line deduction for children under age 13, that would be capped at state average for age of child, and for eldercare for a dependent. The exclusion would not be available to taxpayers with total income over $500,000 for Married-Joint or $250,000 for Single;
  • Rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65% of remaining eligible childcare expenses, subject to a cap. This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less;
  • All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA would be limited to $2,000 per year from all sources. The government would provide a 50% match on parental contributions of up to $1,000 per year for these households.

For business taxpayers:

…The business tax rate would decrease from 35% to 15%;

…The corporate AMT would be eliminated;

…There would be a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%;

…“Most corporate tax expenditures,” except for the research and development credit, would be eliminated;

…Firms engaged in manufacturing in the U.S. could elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made could only be revoked within the first three years of election; and

…The annual cap for the business tax credit for on-site childcare would be increased to $500,000 per year (up from $150,000), and the recapture period would be reduced to five years (down from ten years).

The House Republican’s “A Better Way” plan. On June 24, House Republicans released an installment of their “A Better Way—Our Vision for a Confident America” that contained a number of tax reform proposals. At that time, the Republicans announced that the document (“blueprint”) was meant to serve as the basis of tax reform legislation which will be “ready for legislative action in 2017.” It reflects several months of deliberation by the Tax Reform Tax Force, led by Chairman Brady.

Previously, on June 22, House Republicans had released another installment of their “A Better Way—Our Vision for a Confident America”; this installment contained a number of health care reform proposals.

On November 9, both Chairman Brady and Speaker of the House Paul Ryan (R-WI) mentioned the blueprint as being taken up by Congress, in concert with Mr. Trump, at the beginning of the next session of Congress.

Among its tax provisions regarding individuals, the blueprint would:

…reduce both the top rate (to 33%) and the number of brackets (to three);

…provide for reduced and progressive tax rates on capital gains, dividends and interest income;

…eliminate the AMT;

…consolidate a number of existing family tax benefits into a larger standard deduction and a larger child and dependent tax credit;

…continue the EITC, but look for ways to improve it;

…simplify tax benefits for higher education;

…eliminate all itemized deductions except the mortgage interest deduction and charitable contribution deduction;

…continue current tax incentives for retirement savings; and

…repeal the estate and generation-skipping transfer taxes.

Business tax provisions in the blueprint include:

…creating a new business rate for small businesses that are organized as sole proprietorships or pass-through entities instead of taxing them at individual rates;

…reducing the corporate tax rate to 20%;

…providing for immediate expensing of the cost of business investments;

…allowing interest expense to be deducted only against interest income, with any net interest expense carried forward and allowed as a deduction against net interest income in future years (with special rules that will apply for financial services companies);

…allowing net operating losses (NOLs) to be carried forward indefinitely and increased by an interest factor, and eliminating NOL carrybacks;

…retaining the research credit (but evaluating options to make it more effective);

…generally eliminating certain (but unspecified) special interest deductions and credits;

…shifting to a territorial tax system;

…moving “toward a consumption-based tax approach”;

…providing a 100% exemption for dividends from foreign subsidiaries; and

…generally simplifying international tax rules, including elimination of most of the subpart F rules.

The blueprint suggests a number of IRS reforms, including provisions to:

…“streamline” the agency and center it on three major units: one for families and individuals, one for business, and a new “small claims court” unit that would be independent of IRS and designed to allow routine disputes to be resolved more quickly;

…reform IRS leadership so that it is headed by an Administrator, appointed by the President with the consent and advice of the Senate for a single 3-year term;

…have a “Service First” mission; and

…commit to taxpayer assistance.

And the health care reform proposals would:

…repeal the Affordable Care Act;

…make the following changes to health savings accounts (HSAs): allow spouses to make catch-up contributions to the same HSA account; allow qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA account as long as the account is established within 60 days; set the maximum contribution to an HSA at the maximum combined and allowed annual deductible and out-of-pocket expense limits; and expand accessibility for HSAs to certain groups (e.g., those who get services through the Indian Health Service and TRICARE).

…allow certain purchasing platforms, like private exchanges, to expand. The plan would encourage the use of direct or “defined contribution” methods, such as health reimbursement accounts (HRAs).

…encourage the portability of health insurance. Everyone would have access to financial support for an insurance plan chosen by the individual, which could be taken with them job-to-job, to non-work environments and into retirement years. For those who do not have access to job-based coverage, Medicare, or Medicaid, the proposal would provide an advanceable, refundable tax credit. The portable payment would be increased as the recipient aged.

Comparing the Trump and House proposals. Both the Trump and House Republicans proposals would repeal the Affordable Care Act, significantly lower tax rates on both individuals and businesses, eliminate the AMT, eliminate estate taxes, lessen the relevance of itemized deductions, eliminate some business credits and deductions, and tighten the rules on business interest deductions.

On the other hand, Trump puts great emphasis on new child and elder care tax breaks, and the House Republicans do not. And, the House Republicans consider many changes to existing tax rules that Trump doesn’t mention. And, while the House Republicans’ plan contains, and previous proposals by Trump contained, a special tax rate for businesses that operate as pass-through entities, the current Trump website has no such proposal.

Things to come? Given the newness of the election and its surprise results, we are probably pretty far from understanding the dynamics of the workings of the 115th Congress that will begin its work in January—including whether the Republicans will attempt to pass tax legislation in the Senate under the legislative process called “reconciliation” which only requires a simple majority, or will, instead, allow the Senate filibuster rules to apply to the tax legislation. Similarly, we are probably pretty far from understanding the push and pull between Congressional leaders and President-elect Trump. Thus, even given the large overlap between the proposal of the House Republicans and that of Mr. Trump, we probably have a long way to go in predicting a lot of the specifics of 2017 tax legislation. However, some significant 2017 tax legislation and some significant health care reform legislation seem quite likely.