New Hampshire is typically known as a low tax state. Although it has higher than average property taxes, it does not tax income earned from work and does not have a sales tax. However, New Hampshire does have a lesser known tax on income, specifically an interest and dividends tax. If you've lived in NH your whole life and haven't heard of this tax, you're not alone. This tax does not apply to everyone, but with short-term interest rates at their highest level of the past decade, it's possible that this will apply to more and more people living in the Granite State.
What is an interest and dividend tax?
This New Hampshire tax is only applicable to a certain type of income. Any wages that you earn from work or from your own business do not apply and are excluded from this tax. The tax is only on interest (such as money earned from a savings accounts) and dividends (income distributed to people who own shares of stock, mutual funds, or exchange traded funds). The dividend portion of this tax only applies to dividends earned in a taxable investment account, which are investments outside of your IRA or 401(k). Therefore, any dividends earned in a 401(k) or an IRA are not counted for this tax. Also, the tax does not currently apply to capital gains (selling an investment for more than what you bought it for).
I've never paid this tax before. Should I have been?
Unless you're still doing taxes by hand you probably haven't missed paying the tax because it doesn't apply to many NH taxpayers. There is an exemption of the first $2,400 for an individual, or $4,800 for joint filers. There is also an increased exemption for those age 65 and older, if you're blind, or if you're not yet 65 but are unable to work.1 So, if you haven't been paying the tax, it is likely that you have been below the taxable threshold. Since your investment income gets reported on 1099 tax document, if you use a CPA, Turbo Tax, or another tax-prep software, they should catch whether you need to file a NH return based on what is reported on your Federal return.
How much is the tax?
The tax is 5% on the amount of dividends and interest above the exemption amount. Therefore, if you're a joint filer and earn $5,000 of dividends and interest, you would pay tax on $200 ($5,000 - $4,800) which comes to $10 of total tax ($200 * 5%).
Will I have to pay the tax in the future?
Whether you're required to pay the tax or not depends on how much money you have saved in a bank and invested outside of retirement accounts. Unless the law changes, if you have a modest amount in the bank, and limited investments inside a taxable investment account, you likely won't ever have to pay the tax. However, with interest rates higher than they've been in years, and if you're adding to your investments outside of a retirement plan, it is certainly possible this tax will apply to you someday.
There has also been proposed legislation to tax capital gains in New Hampshire. It passed a house vote earlier in 2019, but has not been finalized into law yet. If this is approved, more people will owe the tax, and those that already pay the tax will likely pay more. Believe it or not, tax planning is not just important for those living in Massachusetts, it can apply to New Hampshire residents too. For help with tax planning now and in the future, we suggest consulting a financial advisor or CPA.