Taxlink by Andy Biebl

Retire to a Tax-Friendly State?

Andy Biebl
By  Andy Biebl , DTN Tax Columnist
Retired farmers may live in tax havens like Florida, but still owe taxes on real estate sales and rents back in their home state. (DTN file photo)

I normally avoid state income tax issues in my column, given that our readership is national. But you might be amused at some of the political discussion in Minnesota over the state's latest income tax hike. And there's a lesson to be learned about a retired farmer's ability to escape a high-taxing state.

MINNESOTA'S STORY

In 2013, the stars aligned in Minnesota for a tax increase. Translation: My home state had the unusual occurrence of one-party control of the House, Senate and governorship. Our previous 7.85% top rate was apparently inadequate, so Minnesota added an upper-tier rate of 9.85%, making it the third highest in the country. Oh, the pride!

Now that we've had several years of these rates, the data is being scrutinized. One analysis found a significant uptick in out-migration of upper incomes, using detailed IRS data that tracks changes in residency from state-to-state by income levels. A countering newspaper article asserted no evidence of high income departures, but that was based merely on a one-year increase in the number of high income returns. Over a 10-year period, Minnesota, consistently a high-taxing state in the region, had growth of only 3% in wealthy taxpayers, whereas Iowa and Wisconsin had 8% annual growth. Tax-free South Dakota showed nearly a 25% annual increase. So apparently taxpayers do vote with their feet.

CHALLENGES TO CHANGING RESIDENCY

Job relocations are noncontroversial. It's the retiree leaving high-taxing State 1 for lower-taxing State 2, but still maintaining a residence and some ties to State 1 that can bring a challenge. Most states start with a physical presence test, such as Minnesota's 183 day rule, combined with the taxpayer's facts regarding the new primary residence. To successfully relocate for tax purposes, the taxpayer must show sufficient days in the new state and also align the many other factors of residency (voting, car and driver license registrations, bank accounts and much more). Most high-taxing states are aggressive in their attempts to scrutinize the status of retirees who still maintain a part-time presence.

THE RETIRED FARMER

So let's say you're that Minnesotan, recently retired from farming and collecting cash rent on your land, but spending a substantial amount of time at your Florida home. The problem with a residency change to the non-taxing state is that land rental income remains taxable in its state of location or situs. The same holds true on those capital gains from the sale of land to Junior. Retired farmers, more than other taxpayers, tend to have a substantial portion of their income sourced in real estate rents or sales, and unfortunately that isn't portable to a new state's taxing regime. On the other hand, income from securities, your IRA withdrawals, taxable Social Security benefits and the like follow residency.

Before you consider a move that has possible tax savings benefits, have your tax advisor run the numbers.

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Editor's note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years' experience in ag taxation, including 30 years as a trainer for the American Institute of CPAs and other technical seminars. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com.

(MZT/BAS)