Tax Guru-Ker$tetter Letter
Monday, May 28, 2001
Avoiding State Taxes
This is nothing new. For as long as I have been in the tax business, there have been people who arrange their lives in such a way as to avoid state income taxes. The most common way to avoid most state tax is to establish one's tax home in a state that doesn't have an income tax.
Nevada and Washington State are popular for people who work in California. Texas is popular for high income people here in Arkansas. Former President George H.W. Bush has for decades pretended that Texas is his tax home in order to legally avoid state income taxes. Florida is a popular tax home for high income earners, such as several professional golfers and Rush Limbaugh.
If you are planning to use this strategy, it is important to work with a good tax planner who can help structure things properly. Even with a tax home in a tax free state, that doesn't mean all income is exempt from state taxes. Personal service income earned inside a taxable state is subject to that state's income tax. Rental & capital gain income from property inside a taxable state is subject to its income tax.
While many people consider such maneuvers to be sneaky and unpatriotic, that is a personal decision. I have always called it the "hassle factor." Everyone has a certain dollar amount that makes the hassle involved with reducing or eliminating taxes worthwhile. This article shows that many newly rich Silicon Valley individuals have exceeded their hassle threshold and are establishing tax homes in Nevada.