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 2018 the rate was 5.1% (dropping to 5.05% in 2019).1 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. Essentially, only the income earned in MA is taxable to Massachusetts. That means none of your investment (dividends/capital gains) or interest is taxable to Massachusetts. More than that, if you split your working time between MA and NH, 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.
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.2 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 tax planning, we have a couple 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.
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 ($12,200 for individuals, or $24,400 for joint in 20193) 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 $14,400 of deductions (charity, mortgage interest, medical expenses, etc.) in order to itemize.
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.
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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