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Texans Could Face Tax Consequences if State Secedes

As discussions surrounding the possibility of Texas seceding from the United States continue, a looming concern for Texans is the potential impact on their taxes.

While the idea of Texas becoming an independent nation raises numerous questions, experts suggest that the tax implications would largely depend on one key factor: citizenship.

The Citizenship Question

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True Tamplin, the founder of Finance Strategists, emphasized the critical role of citizenship in the tax equation.

If Texas were to secede, the citizenship status of its residents would become a central issue.

Those who choose to retain U.S. citizenship or are deemed to do so might still be liable for U.S. taxes on global income based on agreements between the new Texan government and the United States.

Understanding Exit Taxes

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Exit taxes, a term unfamiliar to many, come into play when individuals are considered “covered expatriates” due to certain types of income, such as mark-to-market gains and specified tax-deferred accounts.

These taxes are not solely determined by net worth but are assessed based on various factors.

Factors Influencing Exit Taxes

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Texans with an average annual net income tax exceeding a certain inflation-adjusted threshold, as well as those with a net worth of $2 million or more on the day of secession, could be required to pay exit taxes.

Exceptions exist for dual citizens and certain minors who have complied with all federal tax obligations by filing Form 8854.

Tax Obligations for All Texans

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Every Texas resident would likely need to file a final Form 1040 tax return for the year the state seceded.

Exit taxes apply to mark-to-market gains on assets that appreciated in value while the individual was a U.S. citizen, including stocks.

Additionally, IRA accounts, foreign pension plans, and specific domestic and foreign trusts could also be subject to taxation.

Ongoing Tax Responsibilities

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If Texas residents do not automatically terminate their U.S. citizenship, exit taxes may not be a concern.

Nevertheless, they may still be required to pay taxes on their income, akin to U.S. citizens living abroad.

Negotiations and Social Security

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In a hypothetical secession scenario, contentious matters like taxes and Social Security would be hot topics during negotiations.

The fate of Social Security benefits could hang in the balance, compelling Texans to make difficult choices between retaining their American citizen benefits or relocating.

Economic Implications

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If Texas were to successfully secede without federal taxes, it could trigger a massive economic upheaval with effects lasting for decades.

Jason Nelson, a retired U.S. Army soldier, Marine, and civil affairs specialist in Texas, suggests that while the turmoil would be substantial, Texas might emerge from it in a favorable financial position.

Taxation on the Horizon

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However, this does not mean that Texans would be entirely exempt from taxes.

In the absence of federal taxes, Texas would likely need to implement its taxation system to generate sufficient revenue.

Is Secession Likely?

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Although the Texas Nationalist Movement’s Facebook page boasts 211,000 followers, the legality of Texas seceding remains in doubt.

Historical Supreme Court rulings, such as Texas v. White in 1868, have declared that secession is not permitted under the U.S. Constitution.

Expert Perspectives

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Financial advisor Christopher Hensley of Houston First Financial Group views the concept of secession as a recurring but ultimately impractical idea that often gains attention during election years.

He emphasizes that no state has successfully seceded since the Civil War, and doing so would entail abandoning the benefits derived from the social contract established upon joining the United States.

Potential Sacrifices

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While the discussion of Texas secession sparks interest, Hensley suggests that benefits such as the absence of a state income tax could vanish if secession were realized.

The average Texan might not readily embrace the financial adjustments, including introducing state taxes, that would accompany secession.

In conclusion, as discussions about Texas secession continue, residents must grapple with the complex tax implications that could follow such a significant change in their state’s status within the United States.

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