The 2018 Tax Cuts and Job Act reduces the amount you can deduct for state taxes. You’re limited to just $10,000 for the total of state and local taxes and property tax.
Some high tax states like California, are really going to get hard by that. And that means that a lot of taxpayers are going to be looking for ways to shift out of the California tax system.
How can you legally move your income from a high tax state to a lower tax state? That’s been a question for years, but it’s become even more important now that all those taxes are no longer a tax deduction.
If you have a business, you may have a few options.
- Change your business to a C Corporation. The C Corporation is not a flow-through business structure. It pays tax itself with its own tax return. State and local income tax will continue to be a tax deduction.
- Move most of your business income to a C Corporation. I actually prefer this dual corporate strategy more. Keep your operations company inside an S Corporation and then upstream or sidestream the income to a C Corporation.
- Move your C Corporation to a no or low tax. This one is trickier. You have to consider nexus. Does your home state allow you work in a corporation in another state? Or are they going to want to pull it into the home state. Our January 17th Coaching class about state nexus is going to talk about the new nexus issues for business. A lot has suddenly changed in January 2018. Make sure you know what you need to know.
Those are just 3 strategies to reduce your non-deductible state and local taxes. You may have noticed that the only solution really has to do with your business.
Without a business, your only option is to move. You don’t have a lot of options with this new tax law unless you start a business.
Start a business.