"Tax-free" always has a nice ring to it. The higher the income-tax rate the nicer the ring. The old top rate, at 35 percent, was bad enough. The current highest rate - 39.6 percent - has created a flurry of activity to legally avoid the tax. But wait, there is an additional surtax that can bite you for another 3.8 percent on passive investment income. And there can be more: Your home state may have an income tax. Some states (including Nevada and Florida) have no tax. And other states - New York at 8.82 percent, California at 9.3 percent and Hawaii (the highest) at 11 percent - have killer top rates.
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