He moved to WA to dodge CA income tax
If he waited for the big check before he made that move, CA will find him - it's not where you live when you got the check, it's where you live when you earned it.
If he waited for the big check before he made that move, CA will find him - it's not where you live when you got the check, it's where you live when you earned it.
Not sure that 12% is worth picking up my family and moving to another state if that's the only reason to relocate. CA and WA weather and lifestyle is much different than what he saw in Southern California (I'm guessing that's where he lived since he was in the music industry).
I made that move (from SF Bay Area to Seattle) about 5 years ago (but for work, not taxes), and I'm thinking about going back to CA for the milder winters.
Though moving is easier and cheaper for a single person living in an apartment than someone with a family and house.
So, if its after June when your windfall hits, that particular option is removed and you have to focus on offsetting deductions.
But it resets January 1, every year :)
Trying to get out of paying them would be like saying, "of course I should get help from everyone else for education, housing, infrastructure, etc., but goodness forbid I actually return the favor later on so that others get the same benefit!"
Anyway, it's not like such taxes take away so much of your earnings that you're left with a pittance. At some point you have to ask yourself, "is the amount of happiness I gain from keeping this amount of money worth more than the various things it will be spent on, and the benefit it will give to others?"
(I'm reminded of the Simpsons episode, "The Last of The Red Hat Mamas, where Mr Burns pledges to donate money to a children's hospital, but then uses it extend his own life instead - by 10 minutes[0])
It's a sign of the sad state of things that taxes are treated more like throwing money away, than being a resource used for the common good.
For example, if you work remote for a company based in NY, PA, CT, DE, AR, or NE; your income is taxable in that state regardless of where you live or work. This is known as a "convenience of the employer" test. In fact, before a certain SCOTUS ruling you couldn't even claim a refund on that tax for your residence state's tax return (and even after, that refund is taxable).
California is already considering a wealth exit tax that would apply 10 years worth of tax nexus to anyone who leaves the state. I'd complain about this more, as it goes against the whole concept of freedom of movement... but the US already does the same thing. Emigrate from the US and you'll still be expected to pay US taxes on foreign income. I've heard there's a rule that exempts you from said taxes if you spend the entire tax year outside the US. Some people also take the really risky step of throwing out their US citizenship... which is actually grounds to be permanently banned from entering the US for any reason if they find out that you did so for tax purposes.
That's because you still have U.S. citizenship. You can give that up and not be taxed, as I understand it.
Also, it looks like there are provisions to give you exclusions on your foreign income,if you have any.[1] That seems sane to me, if you live their the whole year and that location is your tax base, then you can exclude all the income from their in your U.S. taxes. But living elsewhere won't protect you from U.S. taxes if you still have the benefit of U.S. citizenship and make a lot of money from the U.S.
California considering a wealth exit tax seems a bit different on first glance, but I could see it making sense if it's somewhat similar in use. If you make your money from California and continue to after moving from there to elsewhere, that money being eligible to be taxed by California because otherwise it's extracting the benefit of California's laws and markets without paying into the system that provides them.
1: https://www.irs.gov/individuals/international-taxpayers/fore...
For Americans, for better or worse, its very large stick (the military) affords its citizens all sorts of benefits while traveling/living abroad.
The USA isn’t exactly hurting for new citizens and it’s probably desirable to have expats incentivised to deliberately relinquish their passports.
Mind you I’m looking at this from the perspective of here in New Zealand, where there’s regular media stories about Australia deporting NZ citizens who moved over there as kids and ended up criminals. There’s no incentives to relinquish an NZ passport so Australia can revoke their citizenship, deport, and they become NZs problem.
That should be "intend to stay there forever", since renouncing your USA citizenship is typically permanent, once you renounce citizenship, it's difficult or impossible to regain it.
This is mostly a myth.
There are lots of examples of cases where people from less RAWR MILITARY countries (like... Sweden) got pulled out of risky situations before the Americans did. In some cases Americans simply have not gotten rescued at all and left to fend for themselves! And the US doesn't perform that service for free... if you get rescued they charge you tens of thousands.
Being able to be negotiated out of detainment has more to do with politics and trade, and the US has a lot of political enemies. The countries where the US military is a factor are countries you're not likely to want to move to and make a living in anyway.
Being able to travel to countries is also weaker as a US citizen, since many countries apply reciprocity, and the US often has stricter immigration controls.
Being American living abroad is mostly a demerit. You can't open bank accounts due to FATCA, you have to pay expensive specialized accountants due to foreign taxation, and in many cases people just don't like you due to your government. I can't think of any situations where being American is a pro over being an EU citizen.
That large stick to me seems to rather hit Americans traveling abroad, in that the US military unfortunately a bit has given ( people from the US ) a bad rep at some places?
when instead I, from western/northern Europe, is welcomed wherever I go (it seems this far)
The foreign income exclusion is not that high, especially if you are a mid career tech worker ($107,600 for 2020), and you will be double taxed on amounts above the exclusion. But at least you can skip California state taxes if you count as a nonresident.
I'm sure different people will have different ideas of what that's worth, but it's available as a choice. People that opt not to renounce citizenship have obviously decided it's worth it to not do so, whether that be keeping future options open, or because they know they plan to return. $100k is a lot of money, even if in many locations its less than a mid-career tech worker salary, so I'm not sure I have any objections to this.
Safe Harbor
Safe harbor is available for certain individuals leaving California under employment-related contracts. The safe harbor provides that an individual domiciled in California who is outside California under an employment-related contract for an uninterrupted period of at least 546 consecutive days will be considered a nonresident unless any of the following is met:
• The individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect.
• The principal purpose of the absence from California is to avoid personal income tax.
The spouse/RDP of the individual covered by this safe harbor rule will also be considered a nonresident while accompanying the individual outside California for at least 546 consecutive days. Return visits to California that do not exceed a total of 45 days during any taxable year covered by the employment contract are considered temporary.
Also many countries have double-taxation treaties to avoid the double taxation when you exceed $100k
I know a bunch of Americans abroad, none of them have to pay any tax to the US, but several of them have to pay specialist accountants to deal with the differences in taxation between the countries. It ends up being a tax on Americans that is not paid to the US but to accountants.
Definitely it depends on the country, the industry, the specific company, and by the definition of mid-career (10 years? 20 years?).
> Also many countries have double-taxation treaties to avoid the double taxation when you exceed $100k
But then again, other countries do not double-tax from the start, so none of the international coworkers of the Americans abroad have to pay any taxes to their home countries, or for specialist accountants to deal with the differences in taxation.
Americans have a big burden of FATCA, specialist accountants and just a lot of stress in general.
And to what end, when most of them end up paying no taxes to the US whatsoever? (this was the point I was trying to make - that after all this BS they are put through, the US is still not getting any extra tax revenue from these people)
It seems like it's mostly so that US politicians can say they've done something about high-profile rich people who have moved to tax havens, rather than actually increase tax income measurably.
The other option is to pay the difference in taxes, so if you were taxed at 50% in the country of residence, and the tax bill in the US would have been 45%, you’ll get the 5% back as tax credits towards future US tax obligations.
If you’re working in most European nations you’ll probably be paying more in tax than you would in the US.
Exclude up to about $100k of your foreign income from US taxes -- after that you still pay US taxes, and at the rate you would have paid if you were paying from the first dollar, meaning if you make $130K, you don't pay US taxes as if you made $30K, you pay the difference between the taxes on $130K and the taxes on $100K.
Deduct whatever you pay in foreign taxes from your US taxes, dollar for dollar.
The US is almost the only country that does this. All of my co-workers from Israel, Ukraine, India, and many other places pay generally no taxes in their home countries.
Freedom of movement is free as in libre, not free as in gratis. “You owe taxes if you leave” isn't a violation of freedom of movement.
It is actually quite a lengthy application process to try and renounce your US Citizenship, and the federal government can simply deny your application.
This has been reinforced by the Supreme Court who could find no distinction between any socioeconomic class optimizing their tax burden, no matter how accessible the privilege becomes for some.
> Perhaps it's naive of me,
I think it would be considered naive to elevate the greed of the state over the greed of an individual. Your current train of thought doesn't seem to factor it in at all, it seems more like "if this kind of authority asks, because I respect it, I must comply" which makes me wonder where the limits are. Any state? Any due process outcome? Any percentage? Would you consider to read the state's law to discover that you are not subjected to the payment in many circumstances that you can create? To me, thats where the naivete lies.
My current thoughts on taxes are that the state incentivizes certain kinds of transactions. And if you don't engage in those kind of transactions then the state taxes a percentage of the remainder. The percentage of the tax being a deterrent, as it would prefer you put your money to use in other ways so that you never pay it. Spending, investments, etc. Which this logic its not about imagining that you are passively paying for roads and schools (you aren't, you are paying interest on the funds the state borrowed from the international markets to pay for the roads and schools that were already going to be paid for regardless, the ones that would be neglected would still be neglected). This is most directly seen with the old healthcare fine: if you don't have healthcare through an employer and don't pay for the affordable care act plan then you pay a $1,000 tax. They are incentivizing you to shift capital to certain areas of the economy, with the fallback being the state. This will be a more productive way for you to think of all transactions with the state.
My original comment does not state my opinions on these parameters of the taxation process. I was commenting on how I felt the act of moving to a new state, just to get out of paying taxes in the state you currently live in (and earned that money in), is, in general, immoral. I could have spent several paragraphs going over every possible exception to this viewpoint, and hedge every assertion with "in general", "except when", etc., but that tends to be tedious to both read and write.
> Would you consider to read the state's law to discover that you are not subjected to the payment in many circumstances that you can create?
> Which this logic its not about imagining that you are passively paying for roads and schools
Could you restate these sentences? I can't quite understand them.
I do find all of these issues related though, and that your comment is only naive because it isn't nuanced enough. Naive wouldn't have been the word I would have led with, as it is your word for yourself willing to be open to another perspective.
I don't find that action immoral because I don't find the state's goal grounded in morality. I find both agents to be amoral, with the individual's amorality being both compliant and reactionary to the state's amoral aggregate legislative process where the legislatures are inattentive and misguided and misled.
*the current state of the US healthcare system notwithstanding.
right, and I find that unrelated to being obligated to pay it.
its more like
"way to go, guys!" buys gas across the county line
"that's a great cause!" buys property in another state
"yes, build that park Leslie Knope!" moves
if I didn't do any of those things then I would pay it. if I wanted 1% - 50% more money to do a different thing and there was a legally compliant way to do so (enabled by the same authorities, mind you), I would consider it
If you move back before, you pay the original tax?
The same for corporations who move to the lowest taxed country.
Apple wants to pay Irish tax rates, then pack up CEO, CFO, and all employees in management positions and move to Ireland and Zoom. Your troops can stay here.
(Your first few big pay days should be exempt from all taxes though, especially if you can prove your were poor, or middle class in the previous 10 years? I’ve never felt it was fair for a guy whom got lucky in business, or life, having to pay a big tax; especially if they were scraping by in previous years. Am I saying the poor unemployed guy who one the lottery shouldn’t have to pay any tax on that first lottery win in life, or business—-yes. Our social safety net is so terrible here, it can’t be an excuse to tax new found wealth. America does not help out it’s poor well enough to tax those first few big pay days.)
But how you arrange doing that within your business framework is hard.
I agree that tax system should take individual person constancy of income into account.
When my accountant tells me to sign here and here to save myself a few thousands a year, I don't ask him "wouldn't these few thousand dollars benefit the general public?" I keep what I earned because I know that if the table's were turned, the state would never choose to give me more than I'm owed either.
and if he did, he'd learn that 5 minutes of estate planning makes it ridiculously easy to avoid having any trouble, especially for a bill that large
so if you know, you know
if you don't, then you might find yourself bombarded by misinformation regarding the music industry, and state taxes on a programming forum
The financial advisor should be able to provide that.
B) Having more than 7M in already-taxed money and spending that on things that supported his own business. When you are doing something you love it feels no different than consumptive spending on a bunch of toys. The spending is tax deductible against the 7M he earned that year. Nothing goes to the government. Ideally he monetizes it to a greater amount in a future year and pays taxes in that future, but its only his problem if he doesn't monetize.
C) Having more than 7M in borrowed funds and spending that on things that supported his own business. Now both the spending and the interest payments are tax deductible against the 7M he earned that year. Nothing, goes to the government. Ideally he monetizes it to a greater amount in a future year and pays taxes in that future, but its only his problem if he doesn't monetize, and maybe the people he borrowed from.
D) Constructively structuring the payment as a capital gain, and moving to Puerto Rico under Act 60. This nullifies state and federal tax, while staying compliant under the federal government and the territory and prior state. This would involve talking with the organization that would pay you, maybe they could give you a share grant of the same amount, or of a discounted product they sell. Distinctly not 5 minutes. This actually might be easy since the royalty rights can already be bought and sold separately than the royalty payment.
E) Selling the rights to royalties to your own private foundation. 5 minutes if you already have a private foundation. Not 5 minutes if you don't. If you want to be liquid you can always pay yourself a modest or fantastic salary from the foundation, which is taxed. Either way, now you only need tax deductions against the much smaller salary while the rest of the liquidity can be invested or just sit there. (There is something equivalent to a 2% tax on the royalty received, and an annual 5% charitable contribution requirement. Still better than 12% and much better than 37% + 12% + self employment tax%)
as you might notice, all of this works no matter what the tax rates are or become, but people in your party that know this will nod and agree with whatever sentiment you have anyway. The politics typically only results in taxing salaried employees slightly higher or slightly lower.
so, most people would be prepared for option A) but its not hard to structure your life for the other options to become options. the trickier part is the big payment. its not supposed to be a "tax dodge" its just understanding why the tax rate can be 0%. Many people's tax experience is opening up Turbotax and crossing their fingers for a refund as the numbers spin like a slot machine, others of us know exactly what should be computed and have pushed chess pieces all year for it.
In which case... I am genuinely curious what the legal rules are.