Income tax question in TN (Franklin, Brentwood: sales, rental, mortgage)

[ctr88]

I know TN has no state income tax but I think they tax interest and dividend income? Does anyone know the % tax on interest & dividend income in TN? I'm self-employed and have a S Corp and receive w-2 pay and a annual dividend payout from my corp. Wondering if this is treated the same as dividend income from stocks owned? Trying to estimate my tax burden if I was to relocated to TN.

[ctr88]

Just did some research online and answered my own question. To my great disappointment there is a 6% tax on S Corp dividends and interest income. That is a major, major bummer as I get most of my income from this. The Nashville area was on the top of my list as places to relocate to but not so sure now. That will be a major cost and will negate any of the savings with lower housing costs. I have heard that there have been rumblings about getting rid of the HALL tax in TN? My guess is you probably wouldn't want to hold your breathe waiting for that to happen.

[keithps]

I think there is a $1250 deduction for individuals, but that said, I support it because in general the folks who are making more than that in interest and dividends are the folks who can afford to pay those taxes. Yes, I know this isn't always true, but I'd say it's pretty accurate.

[ctr88]

Originally Posted by keithps

I think there is a $1250 deduction for individuals, but that said, I support it because in general the folks who are making more than that in interest and dividends are the folks who can afford to pay those taxes. Yes, I know this isn't always true, but I'd say it's pretty accurate.

What you are saying is definitely not always true. You could have a retiree with a Gov't pension that gets $50,000 year from his pension and pays NO state income tax in TN. You could have another retiree (with no pension) that earns $50,000 a year from say mortgage notes as his source of retirement income and has to pay a 6% tax on that in TN.

Additionally, you could have a CEO that makes $1 million a year W-2 income and will pay NO state income tax in TN. But then have a small business owner who holds his small business in a S Corp and makes maybe $60k in a dividend from his Corp (which is most of his income), yet has to pay a 6% tax on that in TN.

I say if you are going to be a "no income tax state", why not just go all the way like TX, FL, WA, SD, WY, NV, Alaska (these states are TRUE no income tax states and do not tax interest or dividend income either).

[eastmemphisguy]

The state is going to get their money one way or another. While there is not a regular state income tax, we have a very high sales tax. Roads and schools don't build themselves.

[BirdieBelle]

Originally Posted by ctr88

I have heard that there have been rumblings about getting rid of the HALL tax in TN? My guess is you probably wouldn't want to hold your breathe waiting for that to happen.

The legislature does have a plan to phase out the Hall Tax. There has been talk about letting cities opt in if they want, but it doubt any elected official would endorse that idea.

Really, the Hall Tax should be called the Williamson County Tax since that is where it hits hardest. The cities WILL have to recoup that $$ somehow, especially Brentwood, which receives about $3M/year in state-shared income from the Hall Tax alone. Franklin receives about half that.

The governor knows that those "hidden" income taxes are a turnoff for many wealthy retirees and CEOs. They will eventually do something about it. Eventually.

[ctr88]

Originally Posted by eastmemphisguy

The state is going to get their money one way or another. While there is not a regular state income tax, we have a very high sales tax. Roads and schools don't build themselves.

I'll take a sales tax over a income tax any day. I can control my consumption. But I shouldn't be punished for being successful at business and earning more money.

[lae60]

Originally Posted by ctr88

I say if you are going to be a "no income tax state", why not just go all the way like TX, FL, WA, SD, WY, NV, Alaska (these states are TRUE no income tax states and do not tax interest or dividend income either).

The concern I would have with following those state's example is that, although they do not have any income tax, they generally have very high property taxes. I would rather not have the high property tax. Income tax on dividends is ok--paying 6% of what you get is controllable. Sales tax is ok, you can choose what you buy. BUT property tax that goes up as your income is steady is not ok--one can be priced out of the home they own by not being able to afford the taxes.

[ctr88]

Originally Posted by lae60

The concern I would have with following those state's example is that, although they do not have any income tax, they generally have very high property taxes. I would rather not have the high property tax. Income tax on dividends is ok--paying 6% of what you get is controllable. Sales tax is ok, you can choose what you buy. BUT property tax that goes up as your income is steady is not ok--one can be priced out of the home they own by not being able to afford the taxes.

This is not totally correct. Yes FL and TX do have high property taxes. But NV, WA, WY, SD do not have particularly high property taxes. In fact WY is the lowest taxed state in the U.S. They have true no state income tax (no Hall tax either) AND very low property taxes. WA has a high sales tax (and no income tax and moderate property tax) and I like this philosophy the best. Because you can control how much you consume. You can also choose to rent and not pay property tax. Also, sales tax adds up to much less than people think. Even if you buy $10,000 worth of taxable goods a year taxed at 8% that is only $800 a year. If you make $100,000 a year interest and dividend income and pay a 6% HALL tax that is $6,000, much, much higher amount.

How is dividend income controllable? Say you own a restaurant and you hold the business as a S Corporation (a common way to hold a small business). As the owner of the S Corp, you get paid much of the businesses profits as a dividend from the Corp. If the business has a great year, you as the owner of the Corp get paid a larger dividend. How is that controllable? You get punished by paying more tax the more successful your business is. That's anti small business.

My grandfather who was a immigrant from Ireland was a blue collar working man. When he retired back in the 1960's his only income was monthly dividend income from AT&T stock and interest income from a few small rental properties he owned and sold and carried back mortgages on. Both would be taxed in TN with the Hall tax. Yet someone who has a Gov't pension income would not be taxed in TN. I find that totally unfair.

[lae60]

Originally Posted by ctr88

This is not totally correct. Yes FL and TX do have high property taxes. But NV, WA, WY, SD do not have particularly high property taxes. In fact WY is the lowest taxed state in the U.S. They have true no state income tax (no Hall tax either) AND very low property taxes. WA has a high sales tax (and no income tax and moderate property tax) and I like this philosophy the best. Because you can control how much you consume. You can also choose to rent and not pay property tax. Also, sales tax adds up to much less than people think. Even if you buy $10,000 worth of taxable goods a year taxed at 8% that is only $800 a year. If you make $100,000 a year interest and dividend income and pay a 6% HALL tax that is $6,000, much, much higher amount.

How is dividend income controllable? Say you own a restaurant and you hold the business as a S Corporation (a common way to hold a small business). As the owner of the S Corp, you get paid much of the businesses profits as a dividend from the Corp. If the business has a great year, you as the owner of the Corp get paid a larger dividend. How is that controllable? You get punished by paying more tax the more successful your business is. That's anti small business.

My grandfather who was a immigrant from Ireland was a blue collar working man. When he retired back in the 1960's his only income was monthly dividend income from AT&T stock and interest income from a few small rental properties he owned and sold and carried back mortgages on. Both would be taxed in TN with the Hall tax. Yet someone who has a Gov't pension income would not be taxed in TN. I find that totally unfair.

Yes, I agree, some of the states listed do not have high property tax rates such as Wyoming, that is why I said 'generally'. But I also was looking at the whole property tax for homes in the state, not just the state part of the tax. So, for example WA state's tax rate is not very high at the state level, but their school taxes are added to that and they typically are high in the nicer areas, plus the municipality, fire department, roads, conservation, etc. etc. etc. taxes are all added to the state property tax, and in the end the total tax bill, in my opinion, is higher.

A business owner in TN would not be in a good situation to create a business where the profits are paid as dividends. A different way of incorporation or doing a limited partnership or something else would be much better. That (the tax situation) is something a business owner should consider when doing business in any state.

I do think that the dividend part is more controllable than the property tax situation. You can not control anything about the property tax--the police want new cars the same year the school district want to build a new school and the same year the fire department wants to buy 2 new engines--you will pay big time that year. That happened to me one year in PA. My property taxes went up 3 times the previous level as the 3 major entities did not coordinate major increases. Yes, they apologized and said they would talk with each other in the future, and the taxes dropped back to normal the next year. BUT that year's tax bill was hard on everyone. I do not know how those on a fixed income pulled it off without major sacrifices.

To control the dividend part you know when you take the $ out that you will pay 6%. You might not like it, but you know that the $100 is really $94 and you can set aside the $6 when you pull the money out. So in that case it is controllable. You can also, depending on how much you have to pull out, stop taking out money when you reach the maximum you can take out prior to taxes being due. You can also look at the tax exempt ways to invest--TN based bonds, etc. and see if it is better to invest in those manners or to invest in stocks and pay the 6%. Again, maybe not the best return on the investment, but the tax is controllable by avoidance.

And I agree that the Hall tax and your grandfather's situation would not be a good deal. He would be much better off in a different state with a different tax situation.