RTS #077 Don’t advocate for committing fraud…duh

There is a lot of tax nonsense out there. You probably do a great job navigating through it, but it’s important to remember that your clients are exposed to that same nonsense. Unfortunately, they don’t spend even a fraction of the time you do on tax education and tax planning so what’s real and what barely counts as putting lipstick on a pig might not be as obvious to them.

Here’s my new favorite example on social media: blatantly advocating for cross-jurisdictional tax fraud. I’m in the Pacific Northwest so the specific example that multiple people have sent to me is no surprise but that makes it no less completely wrong. The basic idea is “earn income in an income tax-free state, do all your shopping in a low/no sales tax state. Some people clearly think this is clever, turns out it’s not even a gray area; it’s tax fraud.

The general scheme also comes up in attempts to claim residency in states you don’t actually live in, hoping for lower tax rates, but again, states have very clear rules on how tax residency works, and if you are caught, you will be paying interest and penalties on top of taxes. There are people who disagree with me, but I never advocate for a strategy that is remotely based on “what can we get away with”. Call me old fashioned that way, but if I sit down with the IRS or State revenue agents, I want to be able to explain my approach with a straight face every single time.

That’s not to say there isn’t any strategic tax planning you can do around a client’s physical location; it just means the gimmicks aren’t worth it. It means understanding the state-specific rules in the states involved, and it means making great life decisions and then finding the most tax-efficient ways to go about them. It doesn’t mean a California taxpayer gets a condo in Nevada and pretends to live there to avoid state income tax. Move or don’t, if you play stupid games you will win stupid prizes.

It could, however, mean intentionally delaying income or accelerating income if you have an out-of-state move planned as part of retirement. If the dream has always been to retire in California to live on a beach and get away from Alaskan winters, more aggressive Roth conversions before the move could save big on taxes, but taxes should never be the only reason we take action, including moving out of state.

It may strike you as silly to spend time on topics like this, but your clients are likely getting bombarded by them, and every time I see them, it is a reminder to me of the value of tax education for clients and for constantly reinforcing to clients that I always want to be part of the conversation. As much as I hate that “friend” with the latest tax strategy, I love it every time a client asks about their friend’s crazy idea because it means I’ve created a relationship where they feel confident enough to ask and get a great answer.

Happy Tax Planning!