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By Che Odom
Aug. 3 — New Jersey's refusal to allow deductions for losses makes it the worst tax state in the U.S. for traders, according to a CPA who authored a treatise on the subject.
“New Jersey's restrictions on deductions translate to higher effective tax rates,” Robert A. Green, a certified public accountant and chief executive officer of Green & Co., said during an Aug. 2 webcast. “Many traders have net losses in some years, and they do not find tax relief in New Jersey.”
Green, author of “The Tax Guide for Traders,” ranked U.S. states from best to worst when it comes to the tax burden placed on traders of financial assets. Texas was the most trader-friendly state, followed by Florida, Washington and Nevada, while New Jersey was the least friendly, followed by California, New York (combined with New York City) and Massachusetts.
The worst states have high individual tax rates and a minor tax regime applicable to S corporations, a business form preferred by traders, Green said. They also all have high estate tax rates and low exemptions, except California, which doesn't have an estate or inheritance tax.
In developing his ranking, Green looked at how states treated S corporations and individual income, estate, franchise and sales taxes.
A trait common among the four states deemed best for traders is the absence of an income tax on individuals.
Traders may move to New Jersey from New York City, thinking they will avoid combined higher taxes in New York state and the city, but many pay higher taxes in New Jersey because the state doesn't allow deductions for losses, Green said.
Such losses include those caused by trading business expenses, net capital losses and trading losses, he said.
California also made the worst list because of its franchise tax, owed by S corporations. The tax is the greater of 1.5 percent of net income or $800, “even in a short year,” Green said.
To reduce the impact of this tax, one should trade a smaller amount of funds, “so you do not owe the franchise tax above the $800 minimum,” he said.
Texas, the best tax state for traders, exempts general partnerships from its franchise tax, provided they are owned entirely by natural persons, Green said.
An S corporation, which traders use to gain access to health insurance and retirement-plan deductions, doesn't qualify for exemption, he said.
“Passive entities,” such as partnerships and non-business trusts, may qualify for exemption if at least 90 percent of the entity's federal gross income is from net capital gains, he said.
Green considers the following states to be “decent” for traders:
Many of the Midwestern states have repealed business taxes on passthrough entities, such as S corporations, and lowered individual income tax rates, earning them a “decent” ranking, Green said.
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A recording of the webinar is at http://greentradertax.com/events/tax-battle-of-the-states/.
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