As the April 18 deadline to file federal income taxes approaches, it’s a good idea to make a list of big-picture possibilities.
(Yes, the regular tax return filing deadline is usually April 15. However, due to the Washington D.C. Emancipation Day holiday being observed on April 15 instead of April 16, tax day is on the following Monday.)
For example, if you are considering making your vacation home your permanent residence, or vice versa, you should begin planning for a change in primary residence status.
If you have been using your vacation home as a rental, consider converting it to a primary residence for a period of at least two years. That way, if you have to sell unexpectedly, you can keep up to $500,000 in gains tax free. However, use caution and keep a paper trail.
Some people who retain homes and remain active in business or community affairs in their original states are finding that state tax officials are challenging their change of personal residence. Officials contend that these folks are still residents for income or estate tax purposes because they have not abandoned their original personal residences.
When intent conflicts with facts and circumstances, determining which residence is actually an individual’s primary residence can be confusing. The determination is usually based on the individual’s objective and facts such as:
• Registering to vote
• Having bank accounts and securities accounts
• Payment of local taxes
• Time spent in state of residency
• Continuous car registration and driver’s license
• Furnishing a primary residence more extensively
• Using state of residence address in registrations and application
If you do move to a different state, know that some states impose a tax on the fair market value sale of intangible personal property owned or controlled by their residents. The intangible personal property that is subject to tax generally includes:
• Stock options
• Commodity futures and contracts
• Notes, bonds, and other obligations for payment of money
• Stocks and shares of incorporated or unincorporated companies, business trusts, and mutual funds.
States have numerous statutory exemptions from the intangible tax for particular assets such as money and cash equivalents, securities issued by the U.S. government, and interests in partnerships that are not publicly traded.
Persons who relocate to states that have enacted sales and use tax laws might be liable for use tax on their purchases. For example, if you purchase goods from an out-of-state vendor that are shipped into your new home state, you might be responsible for paying use tax on those goods.
Some states have become more aggressive in enforcing their sales and use tax laws. They have gone to great lengths––examining U.S. Customs reports, personal checkbooks, and credit card statements and sharing that information with other states. Some states have enacted strict filing responsibilities and record retention statutes with respect to individuals who are subject to sales and use tax laws.
According to Rob Keasal, residential tax specialist in the accounting firm of Peterson Sullivan, P.C., taxpayers often already own the property and would not have to pay a use tax for changing residency and bringing personal property to another state.
“In some states, when a rental is sold with tangible personal property, like a stove and refrigerator, it is considered incidental to the real property and no sales or use tax is paid when the property changes hands,’’ Keasal said. “However, many states are getting tougher. I’ve seen at least one state that even has a use-tax reminder on its income tax return.’’
Tax planners say you can eliminate your intangible tax liability if you structure your planning strategies correctly and implement them on a timely basis. Consider timing your move to avoid the initial year’s tax or by restructuring the ownership of tangible assets.
You will also want to consider the state income tax consequences of a change of residence. If you have bonuses coming, stocks options, or other deferred compensation (as is the case for example, with many professional athletes), carefully plan how you receive these funds relative to your move to avoid excessive state income taxes.
If you plan to move, especially to another state, take time to do the research on the tax ramifications before you get there.
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