New Utah Law Regarding Domicile Starts in 2012

Utah imposes an income tax on all of the income of its residents, and upon Utah-sourced income of non-residents.  Intangible income such as interest, dividends, and capital gains on the sale of stock are taxed in the state of residency.  A resident is a person who is either domiciled in Utah or is a statutory resident because the person maintains a place of abode in Utah and has spent more than 182 days in Utah during the calendar year.  Domicile means the location of your permanent home, where you intend to return after being away.  A domicile is not changed to another state unless three conditions are met:  1) you have a specific intention to abandon your current domicile, 2) you establish an actual physical presence in the new domicile, and 3) you intend to remain in the new domicile permanently.  When a person changes their domicile, they will be a part-year Utah resident through the date of the move out of state.

Individuals who may have a large capital gain from the sale of an intangible, such as shares of stock, may try and avoid Utah tax on the gain by moving their residence to another state that does not impose an income tax, such as Nevada, Wyoming, or Texas.  If they are able to successfully change their residence to such a state before selling their stock, they can save Utah tax of 5% of the gain.  Obviously the gain would need to be very substantial to warrant the financial and personal costs of moving.

Utah has enacted a new law that takes effect on January 1, 2012.  The law sets forth some "bright-line" tests for determining whether an individual has a Utah domicile.  The following is a selected list of factors to avoid if you are claiming to no longer be a Utah resident.

1. You or your spouse are claiming resident tuition as a student attending a public university in Utah,
2. You have a dependent who is claimed on your personal federal income tax return who is enrolled in a public kindergarten, elementary, or secondary school in Utah,
3. You or your spouse claim the 45% primary residence exemption from real estate tax on a home in Utah,
4. You or your spouse are registered to vote in Utah,
5. You or your spouse have a Utah driver's license,
6. You or your spouse have a vehicle registered in Utah,
7. The nature and quality of your living accommodations in Utah are superior to those in the other state, and
8. You or your spouse have claimed to be a Utah resident on an income tax return or on a document filed with or provided to a court or other governmental entity.

Other rules and factors apply.  The new law is found in the Utah Code at 59-10-136.

The Utah Educational Section 529 Savings Plan

The Utah Educational Savings Plan (UESP) is a special college expense savings plan authorized under Section 529 under the Internal Revenue Code.  A parent or a grandparent (for example) can open an account for the benefit of a child or grandchild.  Even though the account owner controls the funds, the contribution to the account is treated as a gift qualifying for the annual $13,000 (in 2011-2012) gift tax exclusion amount.  A special election permits up to five years of gifts to be front-loaded.  For example, if a grandfather contributed $65,000 to the account in 2011, the grandfather could not give any more to that grandchild for the years 2011-2015 without consuming part of the his lifetime exemption from gift and estate tax or incurring some gift tax if the exemption was previously utilized.  If the grandfather died during the five-year time period, the portion of the gift relating to future years would be taxable in his estate.

A Section 529 plan has special income tax benefits.  Income and gains in the account are not taxable.  Account withdrawals are not taxable if used to pay for qualifying higher education expenses, such as tuition, fees, books, room and board.  Withdrawals not used to pay qualifying college expenses are subject to income tax.  The portion of the withdrawal attributable to account earnings is included in the account owner's income tax return and also subject to a 10% penalty.  In addition to following the Federal tax benefits, Utah permits a 5% income tax credit on the first $1,740 (single filer) or $3,480 (joint filer) of contributions for 2011 if the account owner is a Utah resident and provided that the beneficiary was under age 19 when named as the account beneficiary.  The dollar limit is indexed for inflation each year.  The credit can be claimed for more than one qualifying beneficiary.  The credit can be claimed even after the beneficiary turns age 19 or older provided the beneficiary was originally named beneficiary before age 19.

The UESP has been highly rated over its low expenses and investment selection.  More information and enrollment can be made at www.uesp.org.

Tax-Free Gains on Qualified Small Business Stock

A brief time window remains for certain new businesses to be organized as a C corporation for which gain realized on the future sale of stock will be exempt from income tax.  A 100% exclusion applies to Qualified Small Business Stock (QSBS) acquired by noncorporate taxpayers during the period of September 28, 2010 through December 31, 2011.  After 2011 the exclusion drops to 50%.  Also, for QSBS acquired after 2011, an alternative minimum tax preference applies to a portion of the excluded gain.  Furthermore, a 28% Federal capital gain tax rate (instead of the usual 15% maximum rate) applies to unexcluded QSBS capital gains after 2011.  The opportunity to exclude capital gains from income tax also applies to purchases of QSBS from existing corporations that meet the requirement.  Some of the basic requirements are the following:

1. The purchase must be of original issue (after August 10, 1993) stock from the corporation in exchange for money, property contributed to the corporation, or services rendered to the corporation,
2. The corporation must be a domestic C corporation and it may not make the S election,
3. Immediately after the stock is issued, and at all times after August 9, 1993 and before the stock is issued, the corporation's total gross assets are and were $50 million or less, and
4. At least 80% of the value of the corporation's assets were used in the active conduct of one or more qualified businesses.

A qualified business is one that is NOT:

1. A service business in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services,
2. A business whose principal asset is the reputation or skill of one or more employees,
3. A banking, insurance, financing, leasing, investing, or similar business,
4. A farming business,
5. A business whose products are eligible for percentage depletion, or
6. A hotel, motel, restaurant, or similar business.

To be eligible for the gain exclusion, the QSBS must have been held for more than 5 years.  In addition, there is a limitation on how much gain can be excluded.  The limitation is the greater of:

1. A lifetime limit of $10 million of gain from the sale of QSBS in the same corporation ($5 million if married filing separately), or
2. Ten times the taxpayer's total adjusted basis in the QSBS sold.

While the tax benefits of investing in QSBS are significant, so are the rules that must be met to qualify.  If you have the opportunity of investing in or establishing a qualified small business, due diligence must be performed in order to ascertain whether the tax rules have been met before you make the investment.