When Bill approached me about guest blogging, I hadn't heard of tax domicile. It's an intriguing idea, but as Bill says below, I'd encourage you to discuss your options with your accountant or tax attorney before jumping in (and if your health insurance is tied to your home state as mine is, be sure to factor that in, too). This guest post is for informational purposes only and should not be construed as tax or legal advice.
By Bill RoundsFreelancers have a great lifestyle design. You have a ton of freedom to do the projects you want, work as much or as little as you want, work wherever you want, and do it all in your pajamas. In reality you are very savvy business people working very hard to make your business as profitable as possible. But there is one secret tax saving strategy for freelancers that you may not have considered which can add significantly to your bottom line. It has to do with tax domicile.
What Is Tax Domicile?
Tax domicile! What the heck is that? It is basically your tax home, the state where you owe most, if not all, of your state income taxes. The amount you pay can vary a lot depending on the state. Some of the more tax happy states like California, New Jersey and Hawaii collect from 9.5% up to 11% of before-tax income. One quarter of US citizens pay 8% or more. But there are also a handful of states that have no state income tax at all. How much are you paying each year in state income taxes?Where Are You Domiciled?
How do you know where you are domiciled? You are domiciled in the place where you have the closest connections. Any conceivable connection you have to a state might be balanced against other connections. Some common connections are things like where you work, where you own a home, the billing address of your various accounts, etc.What's The Secret?
By now you're dying to know what I'm keeping so secret. The big secret is that people have a lot of control over where they have their connections. Eons ago, if you wanted to benefit from the low taxes in a state, you would have to have all of your mail delivered there so you can check up on your accounts, find a job there, and actually show up to work every day. Not anymore. As a freelancer, none of those practical restrictions apply to you so you have way more control than most people.A lot of you are in the position to establish connections to a state with much lower state income tax rates. Some of you will even be able to form enough connections to change your domicile completely. You can see how control of your connections could be the secret to some big tax savings.
Why Has This Been Kept So Secret?
This is a new concept for a lot of people because the physical ties to a specific place have finally eroded for a large group of people. Thinking about the tax implications and potential tax advantages is just catching up. Since so much of your life is now online, you have more control over where your physical connections are located.Some Have Been Controlling Tax Domicile For A Long Time
This tax domicile thing isn't just a new fangled idea. The uber-wealthy have been controlling their connections for a long time, and saving more money in taxes than I will make in two or three lifetimes. Tiger Woods, Serena and Venus Williams, even U2 does this. And they are each saving millions of dollars a year.Most Important Step
Two of the most important connections are where you work and where you own or rent a home. As a successful freelancer, you probably have complete control over where you work. The biggest cost to you will be to own or rent some kind of residence in a state with low state income taxes. This does not mean that you have to spend all of your time there. Lots of people vacation all over the place without owing income taxes every place they have a vacation home. You can do the same thing, even spend several months at a time on vacation. If your cost to have a residence in a low tax state is less than your taxes, you will probably save a lot of money.Conclusion
This is just a small taste of a complex and riveting topic. It is worth it to talk to an attorney or accountant if you think it might be for you, or if you just like good entertainment. There are a lot of you who might be able to save a lot of money every year applying these principles. Just think of the fancy new work pajamas you could get with all that extra cash.Bill Rounds is a California attorney. He also has a website HowToVanish.com where he shows you how to control how much of your private, personal information is available to the public. Interested in contributing a guest blog post of your own? Check out the guest blogger guidelines.
Flickr photo courtesy of 427