Before You Pack, Check Residency Requirements

Here are answers to recent questions from readers:

Q I need to know which states have little or no income and capital gains taxes. Also, what are the requirements for establishing residency in those states?

I may be in a position to cash in on a large amount of stock in the next few years that would result in a capital gain of about $1 million. The federal government would take 28% of that no matter where I live. But in California, an additional 9%--$90,000--goes to the state.

I would be willing to move to another state for a year and cash in the stock while in residence there, but I am not sure where to look. I would also need to know certain rules, such as: If I work in California for one month of that year, but sell all the stock while living in another state, does any of the gain need to be reported and taxed in California? If I keep my house in California and rent it out while I am gone, how does that affect the capital gain?

All this money is a new thing to me--I have never made more than $75,000 a year and have never saved more than a few thousand dollars.

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A The good news is that there are several states--some near you--that don’t impose income or capital gains taxes. No-income-tax states include Alaska, Washington, Nevada, Texas, Florida, South Dakota and Wyoming, says Sally Adams, an attorney and tax analyst with CCH Inc., a Chicago-based tax publishing company. And state taxes on stock sales are “sourced� to your state of residence at the time of the sale, according to Denise Quade, spokeswoman with the Franchise Tax Board in Sacramento.

The bad news is that moving for a year might not mean you qualify as a “resident� of another state. California looks carefully at taxpayers who leave before cashing in on a large gain. If the state determines that your move was a sham, done only for tax purposes, the Franchise Tax Board could hit you with a host of major penalties, including a tax fraud penalty that could amount to as much as 75% of the tax owed. (In your case, that means you’d owe $153,000--the $90,000 tax plus a $63,000 penalty.)

What does it take to be officially classified as a permanent resident in another state? There are no hard-and-fast rules, but state tax officials look at the amount of time you spent in California versus out of state, where your wife and children live, the location of your personal residence, where your car is registered, where you were issued a driver’s license and where you’re registered to vote. They also consider the location of your doctors, dentists, accountant, church, friends and social clubs. In other words, you have to establish some permanent ties to your new state.

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Q My husband and I were denied a home loan because of derogatory information on my credit report. This information is not mine, but belongs to my mother, who has the same name and address as I do. I’ve tried numerous times since I was 19 to correct this problem, but the credit-reporting companies never seem to get it right. I finally got fed up and left it alone for the last four years. Now my husband and I are missing out on a great opportunity. We can’t wait another month to get it corrected. What do we do?

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A I assume that you have a copy of your credit report because you were denied a loan. (If you don’t have one, get it right away. Federal law requires the credit-reporting companies to provide these reports free following a credit denial based on derogatory information.) Circle the incorrect items and write on the report that they are your mother’s. Then write a terse letter saying that you expect the credit-reporting agencies to correct this long-standing error. It shouldn’t be difficult for them to see that the Social Security numbers and ages are different.

Explain that you have been denied a home loan because of their error and make it clear that if they don’t correct the error--permanently--you’ll take further action. Request that a corrected copy of your report be sent to you when the disputed items are fixed. Make sure you provide your phone number in case they have questions.

On a more immediate level, go back to your banker and explain those items on the report. He should recognize that you don’t have a credit problem and grant your loan. If he can’t, go to another lender and let the lender know, in advance, that there is going to be a credit issue. Explain why. A good banker should be willing and able to investigate further to get you through the loan process.

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If you have a question of general interest that you would like to have answered in a future column, write to: Kathy Kristof, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail [email protected]. Please include your name and phone number in case any details need to be clarified.