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Borderline Tax and Estate Planning: Know the Rules — and the Numbers — Before Making Your Move

March 15, 2010

While much of the discussion in the past year has regarded the changes in the federal estate-tax laws, it is important to also consider issues regarding the differences in tax laws within respective states. When you move from one state to another or live in one state and work in another, there may be tax consequences that need to be reviewed, hopefully before your move is made.

Both Massachusetts and Connecticut are roughly in the 5% bracket, so there is not so much of a significant difference in the income-tax consequences when you work in one state but live in the other. If you file multiple state income-tax returns, you normally receive a credit for the tax paid from one state to another, so there is not a full duplication of income-tax liability in multiple jurisdictions. However, you should consider the capital-gains treatment, potential retirement-plan exemptions, and other consequences of borderline planning. For example, you may live in a state where a state retirement plan is exempt from income taxation and move to another state that taxes your retirement plan.

In addition, some states allow for income tax exemptions of IRAs, since they were not deducted on the state return, when they may have been deducted on the federal return. Therefore, the income received from your IRA, together with all gains and additions, may be taxable in one jurisdiction and not in another. You must also consider the estate tax consequences of living (or dying) in one state versus the other.

For instance, …

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by: Hyman G. Darling

March 15, 2010

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