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Wells, ME

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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 space ...

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.


Starting 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 or $380.


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"?


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 Tax (BET).

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

Interest paid

Dividends paid

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 not.

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.


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 knows it.

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 it.


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.