A number of our clients have already changed their residency to a state with no income taxes – most often Florida, or have been considering making such a change.  They have moved to avoid paying the Tennessee Hall Income Tax which applies to dividends and certain interest.

If you have already moved, you can start making plans to move back in the year 2021.  The Tennessee legislature has just passed the Improve Act, which will permanently eliminate the Hall Income Tax in the year 2021.  The rate will also ratchet down by 1% per year every year between now and 2021.  The rate will be 4% in 2017, 3% in 2018, 2% in 2019, and 1% in 2020.

Unlike prior legislation which made these gradual decreases discretionary, these rate changes will not require any further action from the legislature.

Tax Foundation has published a map showing the top income tax rates in all 50 states. There are seven states that have no income taxes at all: Alaska, Washington, Nevada, Wyoming, South Dakota, Texas, and Florida. Tennessee and New Hampshire only tax dividends and interest. Except for Iowa, the high tax states are on the coasts.

Bloomberg has published an article which concludes that Tennessee has the third lowest taxes of any state in the country. It is somewhat surprising to me that the two states that are ahead of Tennessee both have a state income tax. Mississippi has a 5% income tax, and South Carolina has a 7% income tax.

A lot of my clients feel like they are heavily taxed by Tennessee due to the Hall income tax on dividends and interest as well as gift or inheritance taxes upon transfers of wealth to younger generations. Several of our clients have moved to Florida to avoid the Hall tax, the gift tax, and the inheritance tax. It is somewhat ironic that Florida is not ranked in the best 5 states due to its heavy property taxes.

As usual, there are numerous bills before the Legislature to reduce or eliminate the Hall tax and gift and inheritiance taxes.  Lets hope that some of these bills are enacted so that we can take over the #1 ranking.

The father of one of my clients is considering a move to Nashville in order to be closer to his daughter and grandchildren. He called me regarding the state tax consequences of moving to Tennessee.

The good news is that his income taxes will decrease slightly because Tennessee will not tax his IRA distributions. He will pay the Hall income tax on his dividends and interest, but he is already paying taxes on that income in the state where he currently lives.

The bad news is that Tennessee inheritance tax will apply to his estate when he dies. He currently lives in one of the many states that does not have a state inheritance tax. Based on his estate of $3.5 million, his Tennessee inheritance tax bill will be approximately $225,000.

Inheritance taxes would be much higher if his estate has to pay inheritance tax on the $6 million marital trust that his wife established upon her death. The marital trust will be taxable for federal estate tax purposes. However, Tennessee does not tax marital trusts that were established by residents of other states. Since the Tennessee inheritance tax rate is 9.5%, not having to pay Tennessee tax on the marital trust will reduce his estate’s Tennessee inheritance tax bill by $570,000. He told me that this tax reduction is good enough to allow him to move to Tennessee.  If the marital trust would be subject to Tennessee inheritance tax, he probably would not move.

The planning opportunity is to have a marital trust established for your benefit prior to moving to Tennessee. If you know friends or family members such as parents who are considering a move to Tennessee, encourage them to establish and fund a marital trust prior to moving to Tennessee. For example, a husband might establish a marital trust for his wife prior to moving. The marital trust will not escape federal taxes; however, it will escape Tennessee inheritance taxes because it was established by a non-resident of Tennessee.