Mainers with high net worth or substantial income are finding more and more that they can significantly lower their tax burdens — in life and death — by becoming residents of other states. The tax burden of being a Maine resident is driving people to places like Florida, Georgia and even New Hampshire.Contributing to the […]
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Mainers with high net worth or substantial income are finding more and more that they can significantly lower their tax burdens — in life and death — by becoming residents of other states. The tax burden of being a Maine resident is driving people to places like Florida, Georgia and even New Hampshire.
Contributing to the incentive for higher earners to leave the state is a recently imposed $27,500 limitation on itemized deductions. Without the offset of higher deductions, the Maine income tax burden can be steep for a retiree or person with significant income from pensions and investments. The highest income tax rate of 7.95% kicks in for married couples filing jointly above $41,850 taxable income.
For example, take Mary and John Smith, who are retired and receive a combined annual income of $175,000 from IRAs, dividends, interest and capital gains. They itemize deductions for their real estate taxes, excise taxes, charitable gifts and other eligible items, but now find they are limited to the $27,500 maximum under Maine law. Their Maine income tax is $10,499. If they are lucky enough to have a higher income, say $250,000, the Maine income tax would be $16,462. If they become Florida residents, or residents of any other state without an income tax, their state income taxes drop to zero.
Seven states have no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two states, Tennessee and New Hampshire, tax only dividend and interest income. Obviously, state-by-state comparisons of the total tax burden would also include property taxes and sales taxes, but Maine has both of those, too, and so still compares unfavorably to the no-income-tax states.
No tax respite in death
The tax incentives to change residence become stronger when one considers death taxes. The federal estate tax now applies only to estates of more than $5 million, and for married couples, it is more than $10 million. Maine, however, has “decoupled” itself from the federal tax system so that estates exempt from federal tax are now often subject to a Maine estate tax.
Beginning with deaths occurring on or after Jan. 1, 2013, the Maine estate tax exclusion is $2 million and the tax rates are 8%, 10% and 12%, on estates of more than $2 million. For a Maine resident, this includes all assets in the United States, not just those assets located in Maine.
Going back to our example, if the Smiths have a net worth of $4 million, the Maine estate tax they face is $160,000, though the family will pay nothing in federal estate tax. This is a realistic example, since IRAs of $2.5 million, a house worth $1 million and $500,000 in life insurance totals $4 million. If their net worth were $6 million, their federal taxes would still be zero and the Maine tax would jump to $340,000.
What would their estate tax exposure be if they became residents of Florida? Or Georgia? Or even New Hampshire? Answer: zero. They would have to do some planning to change the ownership of the Maine real estate, say by giving it to their children and paying rent when they are in Maine, to avoid paying a Maine estate tax on that.
As you would anticipate, the Maine Revenue Service looks closely at claims of change in residence by former Mainers and uses a checklist for determining residency. The law says that a “Maine resident” includes an individual who maintains a permanent place of abode in Maine and spends, in the aggregate, more than 183 days of the tax year here, unless he or she is in the U.S. armed forces. In other words, if you own a home in Maine and claim not to be a Maine resident you'd better not be here more than 183 total (not consecutive) days in a calendar year.
The analysis of changing residence is more complicated than I can address here, and there are many factors taken into consideration. If you are contemplating the change you need to get competent tax advice and study all the things (like where you vote, register your cars and get your fishing license) you will have to change to make the claim stick.
Attorney Bryan M. Dench is chairman of the board of directors at Skelton Taintor & Abbott and is listed in Best Lawyers in America as Portland Tax Lawyer of the Year for 2012 and 2014. He can be reached at bdench@sta-law.com