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Fleeing the Taxman

John Yeigh

NEW HAMPSHIRE’S state motto is “live free or die.” But for my wife and me, the first part might be better expressed as “live tax-free.”

We just moved to New Hampshire from Maryland. The move’s main purpose is to be near our kids, enjoy lake and mountain activities, and experience cooler summers. But New Hampshire’s zero tax rate on earned income, pensions and capital gains is a major bonus.

Eight states have no tax on personal income, capital gains or pensions: Texas, Florida, Wyoming, Alaska, Washington, Tennessee, South Dakota and Nevada. New Hampshire currently has a 5% tax on interest and dividend income above $2,400 for single individuals and $4,800 for joint filers. It’s scheduled to phase this out over the next four years, so it’ll be gone by 2027.

Contrast this with our old home state of Maryland, which has a 5.75% state income tax, plus additional local levies on income. Result: On past Roth conversions, in addition to the federal tax hit, my wife and I have incurred 8.1% in state and local taxes.

Most of our life’s savings were accumulated in tax-deferred accounts. Since retiring five years ago, we’ve been aggressively converting these to Roth IRAs to reduce our future tax burden. We hope to continue Roth conversions until our required minimum distributions start in five years, at age 72. That’s also around the time when federal income-tax rates are scheduled to rise, assuming 2017’s tax cuts are allowed to sunset.

New Hampshire is also one of five states without a sales tax. Since we don’t buy much stuff, and our new home came furnished, zero sales tax is not a big deal for us. To be sure, New Hampshire has high property taxes. Still, the savings from zero income taxes can outweigh the property tax bite for those with either high incomes or who make large Roth conversions. That’s why billionaires, retirees and tech employees who work remotely are fleeing to lower-tax states.

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We’ve learned that high-tax states perform residency audits on those that change their residency status while still retaining a home in their old state, which is what we plan to do. Indeed, physical residency is tough to game. Cell phone data, electronic toll road collections, internet activity and video camera recordings can all provide a digital footprint for tax authorities to confirm where we live.

One tax-avoidance strategy is to move fulltime into a recreational vehicle and establish your permanent residence, or domicile, at an RV park in a zero income-tax state. Since the no-tax state doesn’t care about your whereabouts, RV residents may not even reside in that state for most of the year. Boat owners have utilized the same strategy to shift residency.

When changing residency from a high-tax state without selling your house, it’s important to cut many of your ties with your old state. Merely changing your driver’s license and spending less than half the year there may not satisfy tax authorities. They may claim you’re still enjoying the benefits of state residency even if you spend much of your time elsewhere.

That’s why there are apps that allow you to track your residency, including TaxBird, TaxDay and Monaeo. Even this may not be enough for RV residents who continue with many personal activities—such as doctor’s appointments, mail deliveries and property storage units—in their former high-tax state.

There’s more to our tax story: 12 states have estate taxes, while six impose inheritance taxes with a variety of thresholds and exemptions for spouses and other close relatives. Just one state, Maryland, has both an estate and inheritance tax. For even moderately sized estates, Maryland is among the most taxing states when the second spouse dies. The upshot: In moving to New Hampshire, our family will “live free” of many taxes—and, we hope, also die free.

John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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DrLefty
DrLefty
8 months ago

Great point about considering what kinds of taxes you’re most likely to pay. I’m always surprised that CA, where I live, doesn’t end up on the “worst” lists because our income taxes are pretty high. But our property taxes are capped because of Proposition 13 back in the 70s, and we just passed an even better version of it that allows people over 55 to move anywhere in CA and keep their Prop 13 basis.

Doesn’t matter to me, though—I’m a CA lifer and our families are here, so we’re not going anywhere (despite my yearning for Hawaii, which has some nice tax breaks for retirees).

Rick Connor
Rick Connor
8 months ago

John – I wanted to let you know that the information you provided about changing domicile came in very handy today at the AARP TaxAide center I work for. We had a retired married couple. They owned a home in NJ. While visiting their son in FL a few years ago, the husband sustained a serious injury and was confined to a wheelchair. He spent months in a hospital, and then went to his son’s home. He never went back to NJ. He had two pensions and some part-time income sent to his son’s FL address. His wife went back and forth frequently between NJ and FL. The rest of their financial accounts were registered to NJ. His SS, taxes, drivers license, .. were ll still using the NJ address. Using the knowledge I gained in this article, I was able to convince the other preparers that they were domiciled in NJ. Several thought it was only based on how many days one stayed in each state. So thanks for the great story.

Ben Rodriguez
Ben Rodriguez
8 months ago

Good for you! By the time I retire I hope my kids live in a low tax state!

John Yeigh
John Yeigh
8 months ago
Reply to  Ben Rodriguez

Ben – that’s funny. Our family’s migration wasn’t a tax plan but rather a five year outdoors-oriented evolution. Our daughter moved to NH for work, the family visited, we rented and the family vacationed different places there (coast, mountains & lakes), our son liked NH so much that he accepted a job there, daughter’s fiancé got a job there, and we now bought & moved there.

Humble Reader
Humble Reader
8 months ago

The article made me curious enough to do a search for “New Hampshire state revenue sources”.
Found a very nice pie chart at https://nhfpi.org/resource/revenue-in-review-an-overview-of-new-hampshires-tax-system-and-major-revenue-sources/
Summary: 
Sin and entertainment taxes: 30.3% (meals, rentals, tobacco, liquor, lottery)
Property taxes: 20.3% (property, real estate transfer)
Business: 28.4% (profits, enterprise)
Bunch of small taxes or other income sources: 21.0%
I did not dig into where the funding for local governments or additional educational comes from.

David Powell
David Powell
8 months ago

Interesting point about states auditing in the multi-dwelling case. I suppose it makes practical sense but wow.

Does NH tax businesses at a higher rate than average for other states?

Washington recently passed a CG tax on gains over $250K IIRC.

John Yeigh
John Yeigh
8 months ago
Reply to  David Powell

NY seems particularly aggressive in chasing residents who move out for part of the year, but in fairness, most of the publicized cases are for zillionaires, not someone saving a few thousand dollars per year in taxes.
Still, we have several different friends who live in FL and maintain a summer house in the North, and all are meticulous to document that they reside in the Northern house for well less than half the year.

Michael1
Michael1
8 months ago

John, thanks for this article. We’ve thought a lot about this lately as we look to make a move out of our current no income tax residence. It’s common to focus on the no income tax states as being the place to be, but those have to make their money somewhere. So, depending on where one’s income comes from (salary, pension, investments) and what kind of property one has, these states aren’t necessarily superior to states with income taxes. As you’ve illustrated, folks need to look at their personal situations and how specific states’ overall taxation regimes would apply to them.

Rick Connor
Rick Connor
8 months ago

John, thanks for the interesting article. NH is a beautiful state. I have a number of cousins that live in New England, with several in NH. In retirement my aunt and uncle started going to FLA for a month or two, to avoid the extreme cold and “mud season” as things thaw out. I’m always impressed how my cousins take great advantage of the seasons – hiking and biking in spring through fall, and skiing, skating and hockey in winter. If you’re ever near Lake Winnepesaukee my cousin is a well know musician (http://www.paulwarnickmusic.com) in the area and plays gigs in a variety of places. I might try together up there this summer to see one. Congratulations and enjoy exploring your new state.

John Yeigh
John Yeigh
8 months ago
Reply to  Rick Connor

Rick – we’ll check him out as we live right in the Lakes’ district although we were a few million short to afford the ideal house on Lake Winnipesaukee.

Nicholas Clements
Nicholas Clements
8 months ago

As a Maryland resident I cringe at the amount I am paying in taxes and I often think of where we might move to avoid them . But after going through the endless lists of best places to retire to I end up deciding to stay put in Maryland because this is where I have established some close friendships and where I am part of a community that I feel very much a part of. Who knows, perhaps the time will come when I decide enough is enough but I’m not quite there yet.

David Lamb
David Lamb
8 months ago

The article states: “Maryland, has both an estate and inheritance tax. For even moderately sized estates, Maryland is among the most taxing states when the second spouse dies.”

Being curious, wondering why anyone would stay in MD facing that onerous tax obligation, I Googled a bit and found this: “Legislation enacted during the 2014 legislative session gradually conforms the Maryland estate tax exemption amount to the value of the unified credit under the federal estate tax, thereby increasing the amount that can be excluded for Maryland estate tax purposes. The increase in the amount that can be excluded for Maryland estate tax purposes is phased over five years and is equal to (1) $1.5 million for a decedent dying in calendar year 2015; (2) $2.0 million for a decedent dying in calendar year 2016; (3) $3.0 million for a decedent dying in calendar year 2017; (4) $4.0 million for a decedent dying in calendar year 2018; and (5) $5.0 million for a decedent dying on or after January 1, 2019. Check the Internal Revenue Service website for information on the federal estate tax exemption.”

and also this: “Tax rates for decedents who died on or after July 1, 2000:

  • Property passing to a child or other lineal descendant, spouse of a child or other lineal descendant, spouse, parent, grandparent, stepchild or stepparent, siblings or a corporation having only certain of these persons as stockholders is exempt from taxation.”

Of course one should never trust what they find on the internet.

https://marylandtaxes.gov/individual/estate-inheritance/estate-inheritance-tax.php

Michael1
Michael1
8 months ago

Nick, is there something that makes Virginia not a good alternative? Maybe John also looked at Virginia and can comment as well.

IAD
IAD
8 months ago
Reply to  Michael1

I moved from Maryland to Virginia back in the early 1990s for all the reasons the OP listed. There is absolutely zero good reasons to remain in Maryland, especially if one is in some of the more progressive counties such as Montgomery or Prince George county.

John Yeigh
John Yeigh
8 months ago

Our main driver is that both kids live in NH. We still love MD which has lots to offer in moderate climate, sea and mountains, and excellent services with two major cities.
Still, we’ll be saving lots on both income and death taxes. In addition, we have started a business in NH, but that’s for a future HD article.

R Quinn
R Quinn
8 months ago

Sounds like taxpayer heaven. High property taxes is relative, NH is not that bad compared with NJ.

I wonder how NH does it? I’m guessing demographics has something to do with it as does relatively low teacher salaries and state-owned liquor stores. But hey, it works, certainly for retirees.

About those cooler summers, you haven’t forgotten about the also – much- cooler winters have you or are you taking the snowbird route? ☃️💨❄️

Paula Karabelias
Paula Karabelias
8 months ago
Reply to  R Quinn

New Hampshire does it by spending less on all social services. For example, public kindergarten didn’t become widely available until recent years. However, the population generally doesn’t need the level of government services as more urban, populated states like mine ( Massachusetts). Massachusetts loses a lot of people to NH, often because of the estate tax (they don’t want to live in Florida or South Carolina). My next door neighbors are packing to move just over the Mass./ NH border as I write this.

John Yeigh
John Yeigh
8 months ago
Reply to  R Quinn

I likewise don’t understand how NH manages their finances, but the low population provides some of the lowest unemployment rates and crime rates in the country. Help-wanted signs are everywhere. Also, like most low population areas including the mid-West and Western states, the people seem less rushed and extremely nice.

The winters are indeed very cold but with a ski mountain 12 minutes away, we retirees were able to cherry pick the best days. NH’s biggest mountain is 50 minutes away, and seniors ski free midweek. The summer weather is spectacular.

R Quinn
R Quinn
8 months ago
Reply to  John Yeigh

Interesting Kiplinger just released a list of best tax friendly states for retirees and NH isn’t on the top ten list. I don’t get that. https://www.kiplinger.com/business

parkslope
parkslope
8 months ago
Reply to  R Quinn

Kiplinger considers NH unfriendly for retirees because it has the 4th highest property taxes in the US.

Maryland didn’t make the 10 most unfriendly list because property and sales taxes are below the national average.

I’m sure it didn’t surprise you that NJ was ranked the most unfriendly.

John Yeigh
John Yeigh
8 months ago
Reply to  R Quinn

I’ve seen a detailed analysis of all 50 states, and NH came in 46th lowest in overall taxes. NH has among the lowest taxes except for real estate. NH’s car registration fees are maybe $100 higher than average. On the positive, it took 5 minutes to register our cars, and 9 minutes to get our drivers license with super friendly folks managing these changes. In MD, these are each an hour process.
I’m fairly confident that the income tax savings while in high Roth conversion mode plus estate savings in our case can go a long way toward paying for a house in any of the low tax states.

IAD
IAD
8 months ago
Reply to  R Quinn

I’ve found that Kiplinger’s often uses criteria that the majority of folks would never consider. I find it interesting to read, but would never consider it serious enough to use as a down selection.

John Yeigh
John Yeigh
8 months ago
Reply to  IAD

One MD tax that many quickie analyses miss is that individuals are subject to a local (county or city) income tax rate of 2.3-3.2% in addition to the state income tax rate of 2-5.8%.

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