.jpg)
For top earners and business owners, tax rates in high-tax states can be daunting. While moving to tax-friendly states like Texas or Florida is a popular strategy, it isn’t always practical. Fortunately, several sophisticated tax-planning tools, such as incomplete non-grantor (ING) trusts, structured sales, and state-specific tax treatments, offer substantial savings without the need to relocate. Here’s a look at some of the most effective ways high-income earners can keep more of their wealth right where they are.
Using ING Trusts to Minimize State Taxes
Incomplete Non-Grantor (ING) trusts are increasingly popular tools for wealthy individuals looking to bypass state income taxes legally. By setting up an ING trust in states with no tax on trust income, like Nevada or Delaware, business owners and investors can effectively shelter capital gains and other income from state taxes. Once the assets are transferred to the trust, they grow without being subject to state income tax, providing substantial savings over time.
Consider the example of a business owner in a high-tax state like California who wants to sell a company. If they transfer shares to a Nevada-based ING trust before selling, the sale’s proceeds avoid California’s steep capital gains tax, leaving more to invest back into the trust or other ventures. “With more business transactions on the horizon, especially from Baby Boomer business owners, the demand for ING trusts is expected to grow significantly,” says Dan Griffith, Director of Wealth Strategy at Huntington Bank. However, it’s important to consult with a legal advisor, as ING trusts aren’t universally available—some states, such as California, have closed this loophole to local residents.
Structured Sales for Deferred Tax Payments
Structured sales are another powerful tax-saving strategy for business owners looking to reduce tax liabilities without relocating. Instead of receiving a lump-sum payment upon selling a business, owners can opt for structured payments over time, deferring income recognition. By deferring the tax on these payments, business owners can spread out their tax liability and potentially avoid higher income brackets that come with a single large payout.
For instance, a structured sale could enable a business owner to invest sale proceeds in a tax-deferred portfolio that funds installment payments. This tax-deferral approach provides both flexibility and control over timing, ultimately leading to a lower cumulative tax burden. However, structured sales do require careful planning with a tax professional to ensure compliance with IRS regulations.
Pass-Through Entity (PTE) Tax Elections in High-Tax States
The State and Local Tax (SALT) deduction cap, set at $10,000, has put a squeeze on high-income earners, particularly those with business interests in states with high taxes. However, recent legislation in 36 states now allows partnerships and S corporations to deduct state taxes at the entity level through a Pass-Through Entity (PTE) tax election. This allows income taxes paid by the business to be fully deducted, rather than having individual owners face SALT limitations.
Making a PTE tax election can be advantageous in a high-income year or when selling a business. Business owners should work with tax advisors to navigate the varying state rules, as not all PTE tax laws are aligned and may involve timing considerations or additional administrative requirements.
Strategies to Keep More Earnings in High-Tax States
For those not ready to make a cross-country move, there are several actionable steps to reduce taxes while remaining in high-tax states:
Maximize Retirement Contributions: Contributions to tax-advantaged accounts such as 401(k) or SEP IRAs lower taxable income in the current year and grow tax-deferred until withdrawal.
Take Advantage of Depreciation: Business owners can use accelerated depreciation on equipment and real estate to reduce taxable income in the year of purchase. Section 179 and bonus depreciation are valuable tools for writing off large purchases more quickly.
Claim All Available Deductions and Credits: From home office deductions to health insurance premiums, taking full advantage of deductions can substantially reduce taxable income. It’s also wise to investigate any new state-specific tax credits introduced in your region.
Consult With a Tax Professional: Given the complexities of these strategies and the nuances of state tax laws, partnering with an experienced tax advisor can ensure optimal planning. Year-round tax planning, rather than last-minute efforts, often yields the best results in managing income tax.
Conclusion
While moving to a low-tax state may appeal to some, it’s not the only way to lower tax burdens. ING trusts, structured sales, and PTE tax elections offer robust solutions for high-income earners seeking to reduce state tax liabilities without uprooting their lives. By working with knowledgeable tax advisors and implementing these strategies thoughtfully, top earners can maintain a tax-efficient financial structure that keeps more income in their pockets.
Sources
Discover What Grows Wealth with Minimum Effort & Minimum Risk
