AZ high earner tax surcharge messes up roth conversion plan
Trying to figure out how a Roth conversion strategy changes given this new tax development in AZ this year. We were (are) considering a move there later this year or next. Here is the new wrinkle:
In Arizona, starting in 2021, voters approved a 3.5% tax surcharge on high-income taxpayers on top of the current top rate of 4.5%, bringing its new top rate to 8%. Who is high income for purposes of the new tax? Individuals with income above $250,000, and joint filers with income above $500,000.
The 4.5% rate applies to income above $159,000 for individuals or $318,000 for joint filers.
Question: In light of this, would it make sense to do our first year of conversion this year (taxed as NC state tax rate of 5.25%), or, if we move to AZ later, at least make sure our total conversions stay low enough to keep us under the $500k income mark to avoid the extra 3.5% surcharge?
Permalink Submitted by Alan - IRA critic on Thu, 2021-05-27 03:36
Yes, you should attempt to avoid exceeding 500k taxable income while in AZ, but for incomes below that threshold the tax rate in AZ appears lower than NC if NC uses a flat tax rate of 5.25. Note that the next ballot in AZ could contain a proposal for a flat tax in AZ that would eliminate the high rate surcharge, which is very unpopular with those affected.