Ashlea Ebeling appears as Jason’s AMA guest. She is a Forbes editor and talks about the different estate taxes you might face all across the United States. She also touches on federal and income tax on the show. She tells the audience every year she develops an interactive map on Forbes of where you should not die in the United States that you can check out in the show links.
Key Takeaways:
2:50 – How does New York’s state tax have a 164% marginal tax rate?
7:20 – Can you avoid estate taxes? Ashlea breaks down four way you can do this.
11:30 – You have to be careful of inheritance taxes and need to look carefully into that before you give your properties away.
14:20 – Ashlea likes the idea of Roth IRA. Jason thinks there’s nothing stopping the government from changing the rules.
18:10 – There are a lot of new tax rules and regulations happening for 2015 that people need to be aware of.
Tweetables:
The lesson is people need to know about state to state taxes.
Everyone says Florida, but there’s 7 of these no income tax states.
Mentioned In This Episode:
http://www.businessinsider.com/bond-market-panic-phase-of-financial-crisis-2015-1
http://www.forbes.com/sites/ashleaebeling/2014/09/11/where-not-to-die-in-2015/
Transcript
Jason Hartman
It’s my pleasure to welcome Ashlea Ebeling to the show. She is an associate editor with Forbes magazine and Forbes.com. She wrote an interesting piece recently about the New York state tax and how we should be aware of a 164%, yes you heard that right, marginal tax rate and profiles different states around the country and their tax situation and a whole bunch of interesting things. So, it’s a pleasure to have her on today. Ashlea, welcome, how are you?
Ashlea Ebeling:
I’m just fine. Thanks for having me on the show.
Jason:
Well, it’s good to have you. First, let’s dive into this article. I mean, this is insane! I can not believe it. How do we get to more than 100% tax.? As if 100% isn’t bad enough.
Ashlea:
So, New York state tax has this provision called a cliff and people are trying to change it. It’s obviously a problem, but the one thing is New York made sweeping changes to its state tax law just this year and they doubled the amount that is exempt. So, if you had over 1 million dollars before, you would owe a state tax on that amount and they doubled it now to 2.625 million, but the cliff problem is if you die with 5% than that new 2 million dollar number, you face this cliff and that’s where the crazy marginal tax rate would come in.
I can give an example. So, Sharon Klein with Wilmington Trust, she kind of gave me an exact example, because the New York state department of taxation, they did a summary memorandum on the new law, but they neglected to spell out of the affects of the cliffs. So, her example was a taxable state of $2.625,000 would pay no tax, but if you had $2.1 million dollars, you’d have a tax liability of $49,000, so that’s more than the $30,000 of an increase of the value of the state. So, your state has gone up by $37,000, but your taxes would go up by $49,000. So, that’s the affect of the cliff.
Jason:
Boy, this is crazy.
Ashlea:
So, the lesson is people need to know about state to state taxes. The federal estate tax is almost..that’s been changed, so there’s a big, big exemption. The federal exemption of $5 million per person indexed for inflation is now permanent and that is indexed for inflation, so next year the exemption it’ll be $5.43 million. So, obviously most people don’t have to worry about federal estate taxes as all. In the meantime, the state estate taxes can be as long on inheritance taxes it starts at the first dollar and the states with state taxes, New Jersey is the lowest exemption with $675,000. So, people with a nice house, they’re in a state tax territory.
Jason:
Right, they certainly are. So, what do you think, what change do you think will come to this law?
Ashlea:
Well, there are people trying to change that cliff, so it’ll be more gradual. So, that’s a possibility that could get tweaked in the next legislative session and the good news in New York is the law that’s been put in place is it’s eventually going to match the federal exemption in two year. In 2017 the New York state exemption will match the Federal exemption. For most people it’s not going to be an issue.
Jason:
So, when one looks at a state to consider a move, they need to consider what life stage they’re in. If they’re in their career stage and are earning a lot of money, you obviously want a state with no or very low income tax. If you’re retired as mom retired many years ago and she, you know, I told her she should move to Texas and she said, no way, the property taxes are too high and she didn’t care as much as income tax. Texas has no state income tax. So, it really depends. It’s like, where to live during your career years, where to retire, and then where to die. Where to retire and die may be two different things, right?
Ashlea:
They’re very different. It’s going to depend on each family’s specific situation, but you’re right you’re going to have to look at the whole tax picture. You want to look at income tax, sales tax, property tax, there’s a state tax, gift tax. It’s a little crazy that there’s that much to look at, but it makes a huge difference and then for retirees, there’s state pension tax breaks that come into play. So, that’s another. That even goes into the category of income tax, but you have to see whether your state tax is social security or whether it doesn’t. My mom just moved from Virginia to Connecticut, so now her social security is being taxed when it wasn’t in Virginia.
Jason:
Wow, okay, so you’re in Connecticut, I believe, right? And that’s the only state with a gift tax?
Ashlea:
That’s right, Minnesota had one, Tennessee got rid of theirs, I think that was 2012 and Minnesota put one in in 2013 and then last year..earlier this year they finally got rid of it again, so gift taxes are a bit controversial, but the idea with the gift taxes is that the state don’t want people giving big amounts to their heir in a way to avoid the state to state tax. So, Connecticut, for example, has a 2 million dollar limit that you can’t give more than that without having to pay a tax that would go to 12%.
Jason:
So, do we see a lot of people in these states where you have a high state tax, you know, especially in New York, what do they do to get around it? Do they use a charitable remainder trust or what is the vehicle they’re using or do they just try and spend all their money before? I’m spending my children’s money…
Ashlea:
There are probably four big ways that people avoid or get around the state estate taxes. One would be moving, so you could be in New York and then also have a home in Florida and you’d make Florida your residence, but you’d have to really do it, you’d have to be there more than a 183 days a year, you’d have to change bank accounts, drivers licenses, there are all kinds of residency rules to make sure New York doesn’t pull the estate back into their territory. So, moving is the big one. Everyone says Florida all the time, but there’s 7 of these no income tax states.
The second big move that people do is setting up a traditional credit shelter or bypass trust when the first spouse dies and that puts the money that goes into that trust would then be exempt from a state tax, but the tricky thing is is on the federal level you don’t have to worry about, because there’s something called portability and you have all of this..So someone who has $5 million dollars when at the federal level they can send the money over to their spouse and the it’s protected even without a trust, but the state level there’s still more of a need to a trust and estate planning.
Jason:
Very interesting. Anything more you wanna say about different taxes in different jurisdictions, because I want to just wanna touch on some of the other stuff that you’re following and writing about.
Ashlea:
Well, if we look at the, for the state estate taxes, it’s 19 states plus the district of Colombia that have these taxes and why you need to keep track of it, we have an interactive map that we keep on Forbes.com called where not to die and every year it’s updated. There were 8 states that were ensuring changes for 2015, so that’s one place to look. The tax foundation has great maps on tax climate on income tax, taxes on all these other states, so that’s another place for people to look.
Jason:
I’ve seen some very complex charts as you were talking about the comparisons a few minutes ago. I’ve seen very complex charts in terms of all 50 states or maybe 51 one with district of Colombia, 52 with Puerto Rico, which has got some very desirable income and capital gains tax opportunities right now. It’s just a really complicated metrics of all these different issues one needs to consider.
Ashlea:
Well, when you’re thinking of capital gains tax, that’s another thing that people completely don’t think about and that can be taxed in California. I think it’s up to 10.3 there is the top rate for income tax. So, if you’re selling real estate that you know that when you’re going to into it with the capital gains rates are going to be. Not just the federal rate, which has been increased now to 20% to higher income earners, plus there’s another net investment income tax and then there’s the state capital gains tax. You have to add all of those together to really know what your tax rates are going to be.
Jason:
So, I’m looking at the where not to die map now. I found that while you were speaking just a moment ago and I guess the red states, are those the undesirable ones?
Ashlea:
Those are the estate tax states. The blue states are also undesirable in their inheritance tax state and again that’s something a lot of people don’t know. The difference in New Jersey and Maryland, they have both the state and inheritance taxes are a little different, because it’s who gets the money, who pays the tax, whether or not you pay the tax, so Pennsylvanian is a good example. It used to be the spouses paid Pennsylvanian inheritance taxes of 6% tax rate and then people complained about that, because generally for state taxes, spouses don’t pay state taxes at all.
You can give anything when you die to your spouse and it’s state tax free, so this inheritance tax, they were paying 6% in Pennsylvanian, they cut it to 3% in 1994 and then the next year they cut it to 0% and then they get similar to other states, but there’s still..in Pennsylvanian, if you have an estate going to children, grand children, or parents, it’s a 4.5% tax and if it goes to a bother or a sister, it’s a 12% tax, if it goes to a nephew or a niece, it’s 15% tax. So, New Jersey has a similar law to that too and there’s people changing it there too where they think it’s not fair if you’re single and giving your estate to your sister, you’re taxed, but if you have children and you’re going it to them, you’re not taxed.
Jason:
Yeah, very interesting. We should mention the red and blue on this map are not political red and blues, so..
Ashlea:
No, but to some extent to it is if you see like the north east as this big chunk of estate tax states. Washington has the highest rate. Washington state has the highest rate of 20%.
Jason:
Wow, that’s something else.
Ashlea:
Then, the interesting thing, there is prescient for repeal. If you look at this map a few years ago it had a lot more estate tax states. North Carolina and Indiana repealed their taxes in 2013 and Kansas, Ohio, and Oklahoma all repealed theirs in 2010.
Jason:
It is interesting that it follows the political map to some extent and that doesn’t surprise me, but tell us about some of the other stories you’re working on. I know you cover some real estate stuff. I’m kind of looking at your portfolio here on Forbes.com.
Ashlea:
One of my favorite topics is philanthropy and you mentioned charitable remainder trusts, that’s something that’s another great tax move for people who are charitably inclined and I had a nice example of a son who inherited a vacation house in the family and they put it in a charitable remainder trust and then it’s a way to give, to give real estate to charity that works.
Jason:
What do you think of the Roth IRA versus the traditional?
Ashlea:
Well, we at Forbes are huge fans of Roth IRA, but again, it’s a tax place, so if you’re going to be in a higher bracket in retirement, it’s a total no-brainier, you definitely should do it, but some people who should be doing, but aren’t thinking about it are actually in a low tax bracket now and they’re young, so they should be putting money in a Roth, because they don’t get any advantage of the pre-tax that you would for a regular traditional IRA.
Jason:
So, just to explain to the listeners who don’t know, a Roth basically says, pay the tax now, but let it grow tax free. So, you can take it out and the idea is that the tax rate would be much higher later in the future as the country is more fiscally insolvent and looking for money and you’ll just have that money that’s compounded for you over the years tax free because you paid the tax earlier. My fear and why I…maybe I’m just being too paranoid, but the reason why I’m not a big Roth proponent is I just think the government is going to become more and more hungry in years to come and they might just change the law. I mean, what is to stop them from doing that?
Ashlea:
Some people do have that fear and I can’t say that’s implausible, that it could never happen, but I think that’ll be such a outcry that it wouldn’t happen and then another point, you’ve got this two buckets. You automatically, if you’re at a work place plan, any employer money that goes into a plan and earning pre-tax, so some people like doing some Roth, some pre-tax to hedge their bets and whether you actually take money and pay taxes on it to do a Roth conversion, which you can do to try and get more money into a Roth that that’s would be more of a heads in a basket way of what you’re saying.
Jason:
I think these retirement plans are going to become the low hanging fruit in a hopefully not, but a very likely, unfortunately, I think, desperate where the government will say, you know, they wanna nationalize them or, you know, it’s just so easy to attack the retirement plans.
Ashlea:
Well, they’re already proposals out there in the administration that you can only put a certain amount in your retirement plans and after that point then once it’s a, I think, it’s at 2million dollars, once it’s at a certain balance, they’re different numbers depending on the different proposal that you wouldn’t be able to add anymore. So, when you say the proposals out there there’s a reason to be somewhat scared.
Jason:
It seems like the guard against that might be to have a retirement plan whether it be a Roth or traditional that’s one issue that we’ve already discussed, but have it be self-directed, because if it’s self-directed and the assets aren’t just with big brokerage firms and really simple electronic transactions, that’s not going to be low hanging fruit for the government. You know, the self-directed plans if you’ve got, if you own some notes or mortgages, you own some real estate…
Ashlea:
Self-directed plans are great for people who are…you have to really research what you’re putting in with them and make sure you’re not worried about the self-dealing rules, but there are definitely is a place for those for folks. I think though if the government puts in limits, they’re going to apply across the board whether it’s self-directed or through a regular brokerage. Theoretically if you have Roth money in there, you have more money in if they’re just putting limits on and not making a difference between Roth and pre-tax, you can basically have a bigger retirement pot with Roth money.
Jason:
Very interesting. Any other stories that you’re working on or have recently covered that you wanna talk about? Just thought I’d open it up for you.
Ashlea:
Well, I guess the biggest one I finished that got a lot of attention was about the upcoming 2015 tax filing season, which you wanna think about fourth quarter, but the IRS commissioners are warning that it’s going to be the worst season ever and congress is now back in lame duck session and they have 50+ tax extenders that expired, tax clause that expired at the end of last year they still haven’t they decided what they’re doing with. So, there’s a lot of tax news by year end that people should pay attention to, because what happens on those bills is going to affect your tax that you’re paying when you write your check in April or when you’re getting a refund, you’ll get less of refund.
Jason:
Ashlea, so, when you say it’s going to be a really difficult season, what do you mean by that? Law changes, audit risk, what?
Ashlea:
So, law changes, because of these tax extenders, whether some of them..and it’s everything from taking the reduction for sales taxes to teaches to buying $250 worth of supplies to $4,000 college tax breaks, commuter tax benefits, it’s a big list. So, chances are one of the things on that list will affect you and if they don’t, if congress doesn’t get around to figuring out what they’re going to do with those laws by early December, then the IRS commissioner that’ll delay the whole processing of returns, they might have to delay the start of the tax season and that might potentially delay refunds.
Jason:
Wow, what a mess. You know, I remember I was talking to Steven Forbes and then he gave a speech to our group and he just, you know, as a proponent of flat tax, he is so right. You know, he just said, let’s just drive a stake to the school system and start fresh, because this is so overly complex. I mean, I can’t believe it, Ashlea, you know, I am scared to death to sign my tax returns every year, there’s no possible way I can understand the hundreds and hundreds of pages that I’m putting my name on every year. I mean, I don’t even think one highly qualified CPA can understand all of that.
Ashlea:
Well, there are always people say three people get three different answers if they file your taxes for you, which is unfortunately is right and if you call the IRS hotline, you might get two different answers if you call two times and then good luck calling because they’re predicting 34 wait times for the 53% of the people that actually hang on till they get a live person there. So, I wished I had better news on that front, but that’s kind of the way it is. You do the right thing and try and understand the tax laws and get the right kind of advise and one of the reasons they also said about the delay is they’re putting..they’re going to have on the website, on the IRS website a list of tax prepares and obviously if you go to a CPA or an enrolled HN, they’re high standards they have to hold too, but there’s never been a problem with unregulated tax prepares, so we always have to warn people of that. They are going to put up, the IRS is going to start putting up on their website a database of qualified tax preparers.
Jason:
Very, very interesting. We will see how it’ll turns out. Ashlea, give out whatever website you’d like, is it just Forbes.com or something specific?
Ashlea:
Oh, so Forbes.com. The where not to die you can type in if you’re interested to learn more about estate state taxing and my name is Ashlea. So, that’s an easy why to find my articles too and I’d love you to follow me on Forbes or Twitter.
Jason:
What is your Twitter?
Ashlea:
Just Ashlea Ebeling.
Jason:
Okay, Fantastic. Well, thank you so much for joining us, Ashlea. Very informative.
Ashlea:
Thank you, me too. Take care.