This year, I'm rolling my 401k from my old company to a traditional IRA and then into a Roth IRA. My 401k balance is $40,000 and I have no income so far this year, so I figure now is the right time to rollover.
So here's the details. I lived in Michigan (3.9% flat state income tax) for most of the year, but now I'm living in Louisiana (~6% tax bracket). I'm considering visiting Houston, TX (0% state tax) to look for a job now that I'm done with school. Now my question is, what do I need to do in order to avoid paying state income tax altogether (by taking advantage of no Texas state tax)? If I rollover while I'm in Houston, do I need a Texas address so that I can file Texas state income tax for the couple of weeks I'm here? (possibly more if I find a job and decide to settle here.)
It boils down to the the following:
1. Should I get an apartment or a PO Box in Houston and change my address with USPS to that address? I hear the USPS address database is linked to the IRS database these days and I would want to avoid a state income tax audit if they exist. Also, 5% tax on $40k is a good $2k, so it's worthwhile to rent an apartment in Houston if I have to. 2. How long do I need to live in Texas such that I can file state taxes there? 3. Is this a sketchy arrangement that can get me into trouble with the IRS?
Thanks guys for any advice you can give me (and if you can think of any issues I've missed). This seems like an issue I should bring up with a CPA, but I was hoping some of the FW community may have some thoughts on this. Thanks for any advice!
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It is pretty simple. You live where you say you live. Getting a PO box wouldn't be a bad move in a general sense, but when Michigan comes asking for your tax return on the year, tell them you are no longer a resident as of date XYZ.
The USPS is not linked to the IRS.
You may get audited, but that is independent of the USPS and the IRS.
The IRS is seperate and independent from a state's tax collection agency. Pay your Federal taxes and you'll be fine.
codename47 said:The IRS is seperate and independent from a state's tax collection agency. They are separate and independent of course, but it is my understanding that the IRS shares their records with state and local taxing authorities so that those authorities can track down inconsistencies or persons not paying their state and local taxes.
Wouldn't you need to fulfill the residency requirement to file in Texas? Also, since you're a part time resident, wouldn't it be a percentage of the time that you've lived in that state? Michigan is not going to let you walk away from your perceived tax duties so easily.
tazzy531 said:Wouldn't you need to fulfill the residency requirement to file in Texas? Also, since you're a part time resident, wouldn't it be a percentage of the time that you've lived in that state? Michigan is not going to let you walk away from your perceived tax duties so easily.
I agree you should check with Texas to see what the residency requirement is. However, once you have done that I don't see how Michigan can feel the money is theirs. For example, once I graduated college I got a job in another state. My home state had no claim on the money I earned at my new job the first year as I earned it in the new state. I would suspect that would hold true for an IRA rollover as long as the whole process (initial request to final movement of money) was during legal residence in Texas. If any part of the time to complete it was not while a resident there then it would be time to talk to a tax professional (and may be in any case).
Man, look all you need to tell the state of Michigan is that I moved to texas on date X. Do you think they send out the state police to sit outside your house and wait and see if you enter/leave it?
Nobody can file any taxes in Texas. (Say that fast five times.) It is physically impossible. There are no Texas income tax forms. There is no address to mail your income tax forms to. There is no e-filing. There is no one to process your income taxes in Texas.
Since you moved out of MI (I assume you really moved and are not just visiting LA), you will file a return in MI as a part-year resident. You will include all of your income earned while a resident of Michigan. You will not include income earned after you moved out. So, if you do the rollover after you moved out of MI, MI will have no claim to the taxes.
Visiting TX for a week or two will not change the fact that LA considers you a resident. Even if you get a PO box or rent an apartment in TX. Even if you tell them to send the check to a TX address. You are still a resident of LA and LA will want its pound of flesh. If you tried such a tactic in a state that had an income tax (not Texas), you might actually end up owing tax to TWO different states on the same transaction.
To avoid LA taxes, you must actually move out of LA. You must sever your ties with LA. A temporary absence will not suffice.
1) Unless you proved you severed your ties with LA, getting a PO Box or even renting an apartment would not withstand an audit by LA authorities. It could however be used as evidence of intent to commit tax evasion. 2) You can't file state taxes in Texas. Your obligation to LA does not end until you abandon your domicile in LA. 3) The IRS doesn't care where you file state taxes. The state departments of revenue do care.
If you really intend to get a job in Texas and move to Texas, wait until you've permanently moved there to do the rollover.
Edit: I should clarify that the rollover from the 401k to the Traditional IRA is not a taxable event. The conversion from the TIRA to the Roth is the taxable event. You should do the conversion after you have moved permanently to Texas. It doesn't matter when you do the rollover from the 401k to the TIRA.
From the 2005 Louisiana Personal Income Tax Instruction Booklet: 6. A temporary absence from the State of Louisiana does not automatically change your domicile for income tax purposes. You must confirm your intention to change your domicile to another state by actions you have taken to establish a new domicile outside of Louisiana, and by actions you have taken to abandon the Louisiana domicile and its privileges. Examples of such actions taken include: registering to vote, registering and titling vehicles, obtaining a driver’s license, changing children’s school of attendance, obtaining a homestead exemption, or any other actions that show intent to establish a new domicile outside of Louisiana. These are intended as examples and do not necessarily indicate a change in residency. You are considered to be a Louisiana resident if you continue to maintain a residence in Louisiana while working in another state. Use Nonrefundable Tax Credits, Schedule G, Line 1, to report taxes paid to the other state(s).
codename47 said:Man, look all you need to tell the state of Michigan is that I moved to texas on date X. Do you think they send out the state police to sit outside your house and wait and see if you enter/leave it? Are you suggesting that he lie to his state to avoid income taxes? I know you like lawsuits and all but sometimes it can suck when you end up on the wrong end of the law when you do something stupid and illegal (like committing fraud) and end up having to pay the price.
OP's basic observation is a good one, that you can save on state taxes by arranging for your traditional -> Roth conversion to happen while you reside in a low/no income tax state. To do this legally, it won't be as simple as just changing your address however. Read your state's income tax rules on determining your domicile and you'll know whether what you have in mind will pass muster. As I recall, a lot of the factors in deciding your "tax domicile" are pretty fuzzy - ties to the community, an intention to reside there for a period of time, etc. This should work in your favor.
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