After 6 months of unemployment in NY I am taking a job in MA. I have $5,000 of income from NY Municipal Bonds in 2010.
Presumably I should sell the bonds now, but will the interest I earned as a NY resident be taxed by MA? How does this work? Do I file both NY and MA tax returns or what?
Any advice would be appreciated.
Okay, the state tax on $5,000 isn't a whole lot, but it would be nicer to have it than not.
If you move during the year, you file part year returns in both states.
If the muni interest was paid while you were a NY resident, it's hard to see how MA could have any claim on it.
R's, John
"Puffin" wrote
Interest earned is taxed to the state in which you live at that time.
So you'll be filing "part-year" resident returns with each state and prorate the interest accordingly.
Whether to cash it in or not is up to you.
Congrats on the new job. I don't know why you "presumably should sell the bonds now." They don't check your bond holdings at the border and make you sell NY bonds before they'll admit you to MA. Also why are you in muni bonds? Are you at a high income tax bracket?
I was in a high income tax bracket when I bought them 3 years ago. But they have done a great deal better than stocks over the last three years even without a significant tax benefit.
Presumably they won't be tax free on my MA return; so I should either get MA bonds instead, or get rid of municipals. No?
Yeah, makes sense to sell the NY bonds. There may be capital gain or loss, but it is complicated because muni bonds must be amortized. It goes something like this: You buy a $100 bond for $110 and in matures in 10 years, so every year the cost basis of drops by $1, or you buy a $100 bond for $90 so every year the cost basis goes up by $1. This is called amortization of the bond.
What you need to do is figure if the state income tax you need to pay on the interest, as well as possible differences in yields between MA and NY bonds, will make enough of a difference to pay the cost of selling the NY bonds and buying MA bonds. I haven't made any comparisons between yields on insured NY and MA bonds rated AAA; all I know is that insured CA bonds rated AAA are yielding more than other states' bonds with similar maturities.
What can complicate your decision, and make the "replace" option more favorable, are tax or other breaks based on "MA gross income". For example, here in NJ, the first $15,000 (single)/$20,000 (mfj) of pension income is tax free provided that our NJ Gross Income is under $100K. Also in NJ, the income-based portion of our Homestead Rebate (which is rather generous to those at least 65) is based on NJ Gross Income. Thus out-of-state vs in-state interest can cost over $1000 in tax due to the lost pension exclusion and almost as much in the Homestead Rebate.
In NY, on the other hand, as you may already know, property tax rebates and relief that are income-based use "Total Household Income" instead of just "NY Gross Income", which means that Social Security, Interest on U.S. Treasuries and selected agency (e.g., FHA, FHLB, TVA) bonds, and NY municipal bond interest, et. al., affect the amount of income-based property tax relief, so the only effect of out-of-state vs in-state munis is on the state Income Tax that's paid.
Depends on what MA bonds you can get. Your NY munis are still free from federal tax, and the Mass tax on interest is 5.3%. So if available MA bonds pay less than 95% as much as your NY bonds, you might as well hold on to them. Keeping in mind the cost of buying and selling, the break-even point might be even closer.
R's, John
If the bond was bought at a market discount (not to be confused with original issue discount - OID), then the amortization is taxable (ordinary) income. To use your example, if you bought at $90, and the bond matured in 10 years at $100, and there was no OID, then the cost basis at sale would be $100 (no cap gain or loss), but the $10 would have to be declared as ordinary income. If the amortization is de minimus (under 1/4% per year), then you are allowed to treat it as capital gain.
If the bond was bought at a premium, then the amortization reduces the annual municipal (tax-free) income generated by the bond. In most cases, this reduction of tax-free income has no import. But it can affect social security taxes, which are based on total income, including tax-free income. It can also affect estate income tax returns, where expenses incurred by the estate must be allocated to taxable income and tax-free income (pro-rata); you cannot deduct the portion of expenses allocated to the tax-free income.
Finally, note that the amortization for premium bonds must be done by a method called "constant yield to maturity". For discount bonds, you can use this method or the one given above - straight line.
See
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Just to be clear, yes, Massachusetts will tax the interest income on NY bonds. Mass. Gen. L. Chapter 62 §2(a)(1)(A).
As Paul Thomas said, you'll file a part-year resident return in the year of change, and prorate the interest accordingly. After that all of it will be subject to MA tax, assuming you keep the bonds. As others have said, you need to weigh the state income tax cost of keeping the bonds against the tax and other costs of selling them.
Katie in San Diego
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