NH - The No Income Tax State?
Here's my biannual column on the latest developments in New Hampshire's
income tax. For those not privileged with the knowledge of prior
columns, you now enter the portal of NH income tax, where time and
But first, let's explore the myth that NH has no income tax.
Whether you're in the tourist trade, retired, a software company or a clothing
manufacturer, profitable or not, NH has a tax or taxes for you.
INTEREST & DIVIDENDS (I&D TAX)
in 1995, generally expect to pay 5 percent tax on all interest and
dividend income over $2,400 per person exemption. If 65 or older,
your exemption is $3,600.
Assume you have $10,000 of taxable interest and dividends. You may exclude $2,400 exemption and pay 5 percent tax on $7,600
BUSINESS PROFITS TAX (BPT)
My favorite. Probably invokes the most astonishment from old and new
NH taxpayers alike, particularly if they have succumbed to the "NH
does not have an income tax" myth.
If your business gross income is over $50,000 - file a return. Sole-proprietors
may take a "compensation" deduction equal to profit, assuming
that the compensation is "fair."
Say you own a hotel/restaurant which grosses $300,000 with a profit
of $50,000 - you can "comp out" the $50,000 profit and
pay zero BPT. Sell your property in five years with a $200,000 gain
and you may pay 8.5 percent [effective 7/1/2001] or $17,000 for
the privilege. The Dept. of Revenue tries to limit the compensation
deduction in the year of sale.
The BPT is probably the most controversial of NH income tax. What is "fair compensation"?
BUSINESS ENTERPRISE TAX (BET)
The BPT compensation deduction above was the escape hatch for many NH
companies avoiding BPT tax. Many companies paid little or no income
tax currently until the assets of the business were sold. Rather
than fix the BPT, NH gave birth to another tax - the Business Enterprise
File the BET return if your business gross income is over $150,000 or
your BET base is over $75,000.
BET base is:
Salary and wages
Let's say you're a ski area and have salary and wage expense of $500,000
and interest expense of $500,000. You'll pay at a 0.75 percent rate
(.0075) (effective 7/1/2001) on a $1,000,000 base or $7,500. You'll
pay this tax whether you're profitable or not.
The larger question for the BET ... is this really an income tax?
I say yes, but the governor and the legislature pretend that it's
Can you imagine governor and legislature approving an income tax where
each NH resident pays ¾ of 1 percent tax on W-2 income. Heresy.
Instead, make the employer pay the tax and call it something other
than an income tax. Let's see ... Business Enterprise Tax sounds
good. BET is plainly an income tax paid by employers.
PAY ON TIME
After deciding the tax(es) that apply, be sure to pay your tax before
the due date. Extending the return due date does not extend the time for payment. Penalties in NH are severe. If the tax is not paid
on time, expect to pay 6% interest (2005) on the tax
due, 10 percent failure to pay and 25 percent failure to file. Interest and penalties
are a good source of income for the state and the NH Dept. of Revenue
So where are we? We are in a state that has many flavors of income
tax that are not called income tax. Rather than play this game,
our public officials should come clean with the truth. We can take
DESPITE NEW HAMPSHIRES' CLOAKED INCOME TAXES, THERE IS SUBSTANTIAL TAX SAVINGS TO WAGE EARNERS
NH does not tax employee wages, so it easily beats out Maine, Vermont and Massachusetts as the state with the best tax climate. Maine suffocates its residents with the worst tax rate in New England at 8.5%. No one in Maine seems to take responsibility for this avarice. Maine is not business friendly. Judging from the response from journalists and elected officials, who do not return my calls, no one seems to care.
From: The Conway Daily Sun, Monday, April 1, 1996 - Page 5
[Updated to 12/28/05]
© Robert L. Johnson, a CPA/PFS (Personal Financial Specialist), has been advising clients since
1970. His tax business and personal financial consulting firm is located in North Conway, NH and
Wells ME. Articles on this site are general information and not tax advice. Please see your
professional tax advisor.