When it comes to financial planning, taxes are always a top concern. They can become even more tricky when someone lives in one state but works in another. Do you need to file a state return? What income gets reported where? If you're one of the many who live in NH but work in MA, make sure to report your income correctly so you're not overpaying this year.
What income gets reported to MA?
As many in New England know, Massachusetts has an income tax. In 2019 the tax rate was 5.05% but dropped to a flat 5% starting January 1st, 2020. If you live in MA, more or less all income is going to be taxable (wages, interest, dividends, etc.). However, some income, like Social Security or certain pensions won’t be.
Similar to the Federal return, taxpayers are entitled to certain deductions from their income. Everyone receives a personal exemption of $4,400 ($8,800 total if married filing jointly). This is true whether you live in MA, or just work in it. The same is also true for claiming dependents and for paying into Social Security (or similar MA pension system). These deductions will offset your MA income, and you don’t have to live there to take advantage of them!
If you only work in MA and don't live there, not all income is taxable to you. Generally, only the income earned in MA is taxable to Massachusetts. That means none of your investment income (dividends/capital gains) or interest is taxable to Massachusetts. More than that, if you split your working time between MA and NH, usually only a proportionate share of income for the time worked in MA is taxable to the state. As an easy example, if you worked 100 days total during the year and 50 were in MA and 50 in NH only half of your wages would be taxable to Massachusetts.
While this has traditionally been the case, MA recently has announced some changes to how they tax out of state workers. Due to the pandemic, and more individuals working from home, many residents of NH who would normally commute to Massachusetts are currently not doing so. Because of how out of state workers have traditionally been taxed, this means MA is losing more tax revenue from those who live in NH but work in MA. Massachusetts passed an emergency order allowing them to continue to collect tax from those who would normally commute through at least October.
New Hampshire challenged this decision with the Supreme Court. Unfortunately for those in the Granite State, the dispute was rejected by the Supreme Court. This emergency Massachusetts tax rule lasted until June 15, 2021. While paying the additional state tax without commuting is upsetting, the rules for how state income tax is allocated between NH and MA should return to normal going forward.
Alternatively, if your employer reclassifies you as a NH employee this additional tax can likely be avoided. If you are working entirely remotely in New Hampshire, and have been for some time, it is worth asking your employer to reclassify you as an NH employee. We have seen some employers do this automatically, but many are not aware of the tax considerations and have not. It’s worth checking with your employer to see if they can do this for you, if applicable.
The MA emergency order expired on June 15th of this year. While it’s likely NH residents working in MA will need to pay some extra tax this year, as of this writing, it won’t persist into 2022. Expect to be able to prorate your income as you have been able to in previous years going forward.
Another important consideration is that if your spouse does not work in the state, none of their income is taxable to MA. So, if you work in MA and your spouse is in NH, make sure you don’t include your spouse’s income on the MA tax return. You’ll be paying unnecessary taxes if you do!
If you live in NH and work in MA, attributing additional income to MA can have a big tax impact. If your spouse works in NH and earns $100k, and you inadvertently include their income, that’s about an extra $5k of taxes annually! With that tax savings you could go on a nice cruise or add some additional savings to your retirement account (which is something we financial planners always think about!).
What about NH taxes?
New Hampshire is known for not having an income tax. But there is a lesser known tax that may be applicable to those residing in NH. Believe it or not, New Hampshire does have an interest and dividends tax.
Similarly to MA, interest and dividends are only taxable to those who live in NH, not those who work here but live in MA. If you live in Massachusetts and have dividend income, it’ll be taxable to MA instead of NH, even if you work in New Hampshire.
If you've lived in NH all your life, you may not have known about this tax because it does not apply to everyone. The tax only applies if you earn more than $2,400 of interest and dividends if single, $4,800 if filing jointly. If you do happen to earn more than those thresholds, New Hampshire imposes a 5% tax on those amounts. Wages from work are still not taxable, just the dividends and interest.
Should I live in NH or MA?
The decision of where to live is a complex one. As financial planners we certainly care about the tax implications, but more importantly is what’s going to make you happiest long-term. Saving a few thousand dollars a year on taxes is great, but if that means you’ll be subject to an awful commute, those savings might not be worth it.
However, looking through the narrow lens of financial planning, we have a few factors you should consider:
1. Where are you working now?
Where you work (and where you intend to continue to work) is the most important factor. If you and your spouse are already working in MA, moving to NH probably won’t save you much on taxes. You might even end up paying more in taxes since NH is known for generally having a high property tax!
However, if one spouse (or both!) works in NH, and the other in MA, there could be considerable tax savings. Moving to NH will allow the spouse who is working in NH to exclude their income from MA taxes, which would not be the case while living in Massachusetts.
The tax savings for the commuting spouse may be a little trickier this year because of the recent MA order. But only their work income will end up being taxable, not anything else they earn.
2. What about tax deductions?
While almost no one enjoys paying taxes, under the new tax laws, paying state taxes are even less advantageous. You used to be able to deduct state taxes paid from your Federal income taxes as long as you were able to itemize deductions and weren’t subject to the dreaded Alternative Minimum Tax (AMT). However, this has become much less common for two reasons:
First, the standard deduction doubled. As a taxpayer you are allowed to deduct the greater of the standard deduction ($12,550 for individuals, or $25,100 for joint in 2021) or itemized deductions. With an increased standard deduction, this means you would need more “other deductions” to surpass this amount.
Secondly, state taxes paid are capped at $10,000 whether filing single or joint. Even if you’re a high earner in MA, paying thousands of dollars a year in MA taxes, for you and your spouse the amount you’re able to deduct is capped at $10K. This cap also includes other state taxes, like property tax. This means that a joint filer would have to come up with an additional $15,100 of deductions (charity, mortgage interest, medical expenses, etc.) in order to itemize.
3. Don’t forget about the budget!
Budgeting is one of the least exciting, but arguably one of the most important, aspects of a complete financial plan. Knowing where your money is going and why is crucial to saving and reaching your long-term financial planning goals. Since taxes are inevitable, saving money on them is often an overlooked item of your overall expenses. However, it is not the only expense to be concerned with, and you should review other expenses that come with where you decide to live.
As mentioned before, commuting can add up to a large expense. When considering where to live, you should know how long commute will be and how many miles you’ll be driving. This will have a direct impact on how much you pay for gas. But you should also consider whether you will need to pay any tolls, and the wear and tear on your car. If a long commute means that you will likely need to get a new car every 5 years instead of 10, that’s a large expense that may go unnoticed because it is infrequent.
It’s been said that time is money. A long commute can end up costing you more than anticipated if you don’t track it. As an example, if you have children and would be able to pick them up from school if you lived closer, but that is not an option commuting further, you’ll now need to pay for additional after school services. Or possibly the long commute during the week means you have less time to get errands and chores done. In turn you may hire landscapers to take care of your yard instead of doing it yourself. Only you know how much you value your time and what you want to do with it. But considering possible additional expenses because of having less time is an important aspect of fine tuning your budget.
The best way to be prepared for tax time is to keep good records throughout the year. Knowing what income is taxable where is essential in knowing what to track. If you don't have good records this year that's all right, because now you know what you'll need going forward.
Living in NH and working in MA can be tricky but it doesn't have to be. Doing some tax planning during the year and knowing the tax rules in each state is the first step in making this tax season as painless as possible (and possibly save you some money on taxes this year too!).
If you would like help reviewing your tax situation and your overall financial plan we'd love to get in touch. Visit our Contact Page to schedule an appointment or reach out to our team.
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Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.