Moore Colson :: News & Resource Center

Moving to another state?
Be sure to check out the tax climate

Most people decide where to live based on career, family and lifestyle choices, not tax considerations. If you’re thinking about a cross-country move, it pays to do some research on your new home’s tax climate. The weather may be balmy, but you may find the reception from taxing authorities to be icy. Become familiar with your new state’s tax structure so you can plan appropriately to minimize your taxes.

Look beyond income taxes

Rating a state’s “tax-friendliness” based solely on the presence or absence of a state income tax is a mistake. (To see which are without, see the sidebar “States with no income tax.”) There are other taxes to consider — such as property taxes, sales taxes, and inheritance and estate taxes — that may have an even bigger impact. So you need to take your personal circumstances into account, including:

How you earn a living. New Hampshire and Tennessee impose no income tax on wages, but they do tax interest and dividends. So whether you make your money from a job or live off your investment income makes a big difference. Other states have “intangible” taxes that are based on the value of certain investments or other assets. Plus, many states — even some with high income taxes — offer significant tax breaks for pensions, retirement plan distributions and Social Security payments.

Where you live within the state. Generally taxes, particularly property and sales taxes, are higher in large cities and suburbs than they are in rural areas.

Whether you own your home. A state that’s tax-friendly in most areas may impose high property taxes. Of course, property taxes can reduce your federal income tax bill, but they can also cause you to be subject to the federal alternative minimum tax (AMT. Property tax is not deductible for AMT purposes.

Where your property is located. State death taxes are usually imposed by the state of domicile. But even if you change your domicile to a state without a death tax, you may be subject to tax by the state where real estate or other property is located. One way to avoid those taxes is to sell property and reinvest the proceeds in the new state. Or, in some cases, it may be possible to avoid the tax by transferring property to a trust or limited liability company.

Understand how domicile and residency differ

When you move from one state to another or buy a second home there, you’ll want to avoid a situation in which both states are competing for your tax dollars. But unless you sever all your connections to the old state, you may be subject to tax liability in both. The key to understanding and minimizing taxation by multiple states is domicile.

Your domicile is the place where you have your “true, fixed, permanent home.” It’s also defined as “the principal establishment to which you intend to return whenever absent.” You may be a resident of two or more states at once, but you can have only one domicile. Generally, the state where you’re born is presumed to be your domicile unless there’s evidence that it has changed.

In most states, you’re not subject to tax as a resident unless you spend more than half the year in that state. But if a state is considered your domicile, it may be able to reach all of your income — no matter where you earn it — regardless of how much time you spend in the state. Just because you’re subject to taxes in more than one state doesn’t mean your tax bill will double. Most states offer a credit for taxes paid to other states.

If needed, change your domicile

To avoid unpleasant tax surprises, establish your domicile and your residence in the new state as soon as possible. Technically, domicile is a state of mind, so all you have to do to change it is intend the new state to be your true, fixed, permanent home. Unfortunately, the government can’t read your mind, so it will look at various factors that reflect your intent, including:

There are several steps you can take to establish your domicile in a new state — see “Demonstrating your intent” above.

Keep in mind that, even if you change your domicile, the old state can still tax income from sources located there, such as a business or rental real estate.

Watch out for a tax storm

If you’re contemplating moving to another state, talk with your tax advisor about the potential tax implications and steps you can take to reduce your tax bite. The right moves will depend on the tax laws in each state and on your circumstances.

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Avoiding withdrawal pains
6 ways to tap IRA funds penalty-free

Withdrawing savings from your IRA before you retire should be a last resort. You lose the benefit of continued tax-deferred growth, and withdrawing funds before age 591⁄2 will result in income taxes and a 10% penalty.

But if you need funds to handle unforeseen circumstances and you’ve run out of options, you can take advantage of several exemptions that allow you to make an early withdrawal from your IRA penalty-free — though funds will still be subject to ordinary income taxes. Six common exemptions are:

Disability. If you become disabled, you can withdraw IRA funds penalty-free. Keep in mind that you must meet the IRS’s definition of disability and be prepared to furnish proof. The IRS considers you to be disabled if you’re unable to engage in any “substantial gainful activity” as a result of a physical or mental impairment that’s expected to result in death or to be of long-continued or indefinite duration.
Deductible medical expenses. There’s no penalty on IRA withdrawals up to the amount of your deductible medical expenses for the year. Deductible medical expenses are those that exceed 7.5% of your adjusted gross income (AGI), regardless of whether you itemize. For example, if your medical expenses for the year are $10,000 and your AGI is $100,000, you can withdraw up to $2,500 from your IRA to help cover those costs.
Health insurance premiums. If you’re unemployed, you can withdraw IRA funds penalty-free to pay health insurance premiums for you and your family. To qualify for this exemption, you must receive federal or state unemployment compensation for at least 12 consecutive weeks, and the IRA distribution must be made in the year you receive the unemployment compensation or in the following year. The exemption doesn’t apply to IRA distributions made after you’ve been re-employed for 60 days.
Higher education expenses. There’s no penalty on IRA withdrawals used to pay qualified higher education expenses — including tuition, fees, books, supplies and equipment — for you or your family. But the amount you can withdraw penalty-free is reduced by the amount of any expenses paid with a Pell Grant or certain other tax-free educational assistance.
First-time home purchase. You can withdraw IRA funds penalty-free — up to a lifetime limit of $10,000 — if they’re used within 120 days to pay qualified acquisition costs for a first-time purchase of a principal residence by you or certain family members. Note that the term “first-time” doesn’t rule out previous home ownership. It simply means that the homebuyer and, if applicable, his or her spouse have not owned a principal residence during the previous two years.
Periodic payments. The 10% penalty doesn’t apply to distributions that are part of a series of substantially equal periodic payments, paid at least annually, over your life expectancy or over the joint life expectancies of you and a designated beneficiary. Once you start the payments, however, you can’t modify them for five years or until you reach age 591⁄2, whichever is later. Otherwise, you may trigger retroactive penalties and interest on all of your payments, including the ones you’ve already received.

These and other exemptions may also apply to Roth IRAs and qualified retirement plans, such as 401(k) and 403(b) plans. But there are different rules and restrictions depending on the plan type involved, so consult your tax advisor to review your options.

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Your IRAs
Taking out is just as important as putting in

Most people include IRAs as a key component of their retirement planning strategies, whether they contribute to the account annually or fund it with a 401(k) rollover. But while you may view your IRA as a savings tool that you automatically add to year after year, you may not realize that the IRS has strict rules on when you can — and when you must — pull money out of the account.

Traditional vs. Roth

Although traditional and Roth IRAs both offer tax-saving benefits for retirement, each treats distributions quite differently. With a traditional IRA, distributions are subject to your ordinary income tax rate at the time you receive them.

Conversely, with a Roth IRA, qualified distributions are tax free. This has a couple of additional benefits. First, because Roth IRA distributions aren’t included in your taxable income, they can’t cause any Social Security benefits you’re receiving to become taxable, which sometimes occurs when withdrawals are made from traditional IRAs. Also, if your loved ones inherit your Roth IRA, they will owe no income tax on the distributions they take, whereas they will owe income tax on distributions from your traditional IRA.

Withdrawing too early

Until you reach age 59½, traditional or Roth IRA distributions are generally subject to a 10% early withdrawal penalty.

But, there are instances when you may take early distributions penalty-free. For example, you won’t be penalized if you take regular distributions in virtually equal amounts over your life, or if you buy or rebuild a first home — up to a $10,000 lifetime limit.

You also won’t face early withdrawal penalties if you use the funds to pay qualified higher education expenses or medical insurance premiums while you’re unemployed. Moreover, those who receive reimbursement of excess medical costs or become disabled may withdraw funds without penalty.

The IRS treats Roth distributions first as nontaxable returns of contributions, so you won’t owe tax or the 10% early withdrawal penalty on distributions that don’t exceed contributions, regardless of when you take them.

Withdrawing too late

Although Roth IRAs have no mandatory distribution requirement, traditional IRAs do: You must begin taking annual distributions from these accounts by April 1 of the year after you turn age 70½ and receive subsequent distributions by Dec. 31 each year. If you ignore the deadlines, you’ll face a 50% penalty on the amount you should have taken — on top of the income tax bite.

What’s worse, the IRS requires delinquent taxpayers to make up such oversights by taking two minimum distributions the next year. This could push you into a higher tax bracket and even cause you to miss out on certain tax deductions, exemptions and credits because your adjusted gross income (AGI) may exceed phaseout levels. And you could incur more tax on your Social Security benefits.

Never fear, that’s why we’re here

If all these rules make your head spin, don’t worry. We can help you with this very important aspect of your overall retirement planning.

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Get lean to increase competitiveness and profitability

After World War II, Toyota was a struggling manufacturer trying to compete with GM, Ford and the world’s other automotive powerhouses. Because it couldn’t go toe to toe with its larger rivals and their heavily automated assembly lines, Toyota developed a more flexible and efficient system: It removed waste from every step in its processes. This methodology came to be known as the Toyota Production System, which was later dubbed “lean” by Western experts.

Over the past decades, it’s been adopted by retailers, many types of manufacturers, health care providers, distributors and other types of businesses. Going lean might be the way to a more productive, profitable future for your business, too.

Waste not, want not

Lean is about the relentless pursuit, identification and elimination of waste in business processes to produce value for the customer. Lean classifies waste into eight categories:

1. Overproduction. Lean operations often avoid or eliminate large-scale production equipment because the equipment is so expensive and fast that there’s a tendency to keep it busy regardless of demand or to produce items in large batches.

2. Waiting. Many business processes have significantly more waiting time than actual value-added steps — those that actually provide benefit to the customer. In order processing, for example: Why does it take days for a vendor to ship an item when the time spent entering the order, verifying payment information, pulling the item from the warehouse and packaging it probably takes less than one hour of actual labor?

3. Unnecessary transport. Goods are moved multiple times or there’s too great a distance between value-added steps.

4. Unnecessary movement by workers. In many environments, employees spend a lot of time needlessly moving around, gathering the materials they need to do their jobs. Lean improvements place items at the point of use as much as possible.

5. Overprocessing. Documents may be reviewed or signed by multiple people who really add no value to a process.

6. Excess inventory. It takes up space and ties up capital. But worse, excess inventory gets in the way of efficient workflow and poses a high risk of obsolescence.

7. Defects. These negatively impact productivity, increase material demand and add other costs, such as for additional inspections. And if defects slip through, they often negatively impact customer satisfaction.

8. Unused employee creativity. Some lean implementations fall short of expectations because they don’t focus on continuous improvement. To achieve that requires engaging employees, listening to their concerns and suggestions, and then acting upon them.

Get to the core of the matter

To eliminate these wastes and achieve the most value for customers, lean projects focus on making improvements by implementing a set of core principles, including:

One-piece flow. This principle responds specifically to customer demand, or “pull,” as opposed to batch processes. Batch processes tend to create overproduction, excess inventory, excess movement, and excessive delays because orders often must be accumulated over time until there’s enough to produce a batch. And, while it seems counterintuitive, batch processes often result in longer average cycle times.

First in, first out. Employing this principle helps companies provide consistent quality and response times and limits the opportunity for out-of-date goods.
Materials at point of use. Supplies located as close to operators as possible reduce unnecessary movement.

Mistake-proofing. Employing such processes can minimize the opportunity for errors.

Visual management control. Processes should be designed so that, at a glance, the abnormal can be easily distinguished from the normal.

Unified layout. In lean operations, the processes move from one value-added step to the next with as little non-value-added transport, waiting, employee movement and so forth in between.

Balanced distribution. This lean process distributes tasks equally among employees, so that workloads are smoothed out as much as possible.

Metrics. Successful lean projects define and track metrics, such as defect rates, cycle times, costs and customer satisfaction, to measure success and know where adjustments need to be made.

Finally, an important lean concept is standard work. This involves developing standards on how to carry out every step in a process. Employee input on improvements to the standards is encouraged, but changes aren’t implemented until consensus is reached. Then, to ensure quality and reliability, all employees are expected to follow the standards.

Leaning toward a better tomorrow

Lean manufacturing certainly worked for Toyota, which has been perfecting it for 60 years. It’s important, though, to lean on the experience of qualified consultants to lead your staff through the first few improvement projects. Then, as more employees develop lean expertise, they can spread lean concepts on their own.

Lean tools

Here are some commonly used lean tools and techniques:

Value stream mapping. This is process documentation that graphically depicts a product or service, information, value and waste throughout a process from supplier to customer. It’s often used to identify and evaluate improvement opportunities.

5S. The five S’s are an environmental standardization that’s often a precursor to a more extensive lean improvement effort. They stand for:

Sort – the necessary from the unnecessary,
Shine – decluttering to reveal potential problems,
Set in order – organizing the work environment,
Standardize – clearly documenting and communicating the new environment, and
Sustain – maintaining the work that has been done.

Kaizen event. This is a focused improvement project done over a short period of time with an intense burst of activity.

Full lean improvement project. A larger, longer effort that analyzes processes to dramatically reduce waste.

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Are you giving on blind faith?

Many charities vie for your donations, but few provide much detail on where your contributions go. Do your dollars go directly to the program? Or are they diverted to administrative and operational needs? The more you know about what charities do with their funds, the better equipped you’ll be to make smart giving decisions.

Following the money trail

Some not-for-profits publish financial statements in their annual reports. While this information may provide a big-picture view, it often lacks sufficient detail to give you a good understanding of an organization’s true finances.

To get down to the nitty-gritty, check out the not-for-profit’s Form 990. A charity must provide, via the Form 990, detail on its expenses in three major categories: programs, management and fund raising. It also must break down income into 13 categories, such as memberships, program fees, private contributions, government funding, and investment income, and provide backup detail in some cases. The charity is also required to explain key programs and the expenses associated with each. Details on the organization’s assets must also be specified and, as with a public company annual report, the nonprofit must list the salaries of the highest paid employees.

Hitting pay dirt

Except for the list of donors, the entire Form 990 is public information. Charities are required to provide a copy to any interested party at no charge except for a nominal copying fee. You may also request any charity’s Form 990 directly from the IRS. But the easiest and least expensive way to view the form is online. Simply go to the Philanthropic Research (www.Guidestar.org) or the Foundation Center (foundationcenter.org) Web site.

If you view your charitable contributions as investments, you’ll understand why you must seek organizations that provide good returns by controlling their fund-raising and management expenses and efficiently and effectively providing services.

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