Federal tax savings are often touted for financial considerations of clients in areas such as gains, deductible losses, donations and bond income. But many of these well-intentioned tactics don’t always work out as well with state taxes, advisors say.

“While it’s nice to maybe get a federal benefit and a lower tax liability, that unexpected check to be paid to your state really hurts,” said Barbara Taibi, a partner for private client services at Eisner Advisory Group in Iselin, N.J.

There’s no blanket answer on “whether the taxpayers’ home state has conformity with federal regulations, how the state calculates the starting point for taxable income and [states’] treatment of federally accepted deductions,” added Miklos Ringbauer, CPA and founder of MiklosCPA in Los Angeles.

When clients think about moving from a high-tax to a low-tax state, advisors say several factors should be kept in mind to keep state tax bills as low as possible:

Gains
“If you sell a house, in a state with income tax, you will pay that state tax on the gain no matter where you currently reside,” Taibi said. “Just because you live in Texas and pay no state tax there, when you sell your Connecticut home, you’ll still need to pay Connecticut income tax on that gain."

The federal rule is that capital gains offset capital losses and any excess losses can be carried forward and used to offset future gains and up to $3,000 a year can be used to offset other sources of income, but “there are states that do not have capital loss carry-over provisions,” Taibi said.

Depreciation
Not all states conform to federal tax rules regarding business expense deductions.

“Sec. 179 has the IRS allowing $1.22 million [in deductions], whereas California does not conform and only allows $25,000,” Ringbauer said, adding that several states also don’t conform to the federal bonus depreciation.

“The total business expenses permitted by some states can have considerable variation. One notable example is the depreciation expense,” said Richard Pianoforte, managing director at Fiduciary Trust International, New York. “While some states align with federal regulations on depreciation, others differ from federal law, potentially raising total income within those states.”

Donations
Charity-minded clients older than 70½ can make contributions up to $100,000 directly from their IRA, a federal break that will exclude that amount from ordinary income (though disallow the charitable deduction). This may not be allowed by a client’s state.

“In some cases, in a gross-income state, you’ll have the total income to report with no offset for charitable contributions,” Taibi said.

“Most taxpayers assume they will enjoy a state and local tax benefit from charitable contributions,” added John Bute, CPA, managing director at LTax, based out of Boca Raton, Fla. But “charitable contributions are deductible for state and local tax purposes in only 31 states, with 13 of those jurisdictions subjecting deductions to additional limitations.”

One potential limitation to a state tax break, Ringbauer added, is that a charity must qualify for tax-exempt status in that state.

Bond Income
Clients probably assume that municipal bonds are a tax-advantaged investment. “Typically, municipal bonds are exempt from federal taxes [but] if you purchase municipal bonds issued from a state other than your state of residence, they’re typically included in your taxable income for most states,” Pianoforte said. “Generally, a resident’s own state municipal bonds are tax-exempt in that state [but] there are exceptions.”

Added Bute, “Resident state and local income tax rates are also a critical consideration. The tax benefit of in-state municipal bond investing for a California resident with a 13.3% tax rate is vastly different than a Texas resident, where there’s no individual income tax.”