Many people consider moving to another state when they retire. Some move for a lower cost of living, nicer weather, or to be closer to family. If you are considering this in your retirement, make sure to also think about how the state and local taxes will affect your anticipated income.
Look at all the types of taxes you may be paying
Moving to a state with no personal income tax can be a huge benefit. As a state resident, however, there are typically other types of taxes that may negate such tax benefits. For instance, property taxes may be quite a bit higher than you are used to paying, and the state may have higher, or additional, sales taxes and estate taxes.
For states where you may have an income tax, look at the types of income you will be taxed on. For example, some may not tax wages, but they do tax interest and dividends. Some states also give tax breaks for pension payments, retirement plan distributions, and Social Security payments.
Beware of estate taxes
You most likely will not have to worry about the federal estate tax. With the Tax Cuts and Jobs Act (TCJA), the federal estate tax exemption is currently $11.4 million, or $22.8 million for a married couple. However, some states have an estate tax with a lower exemption amount and some may include an additional inheritance tax, or the inheritance tax may be in lieu of an estate tax.
Establishing residency (aka domicile)
If you plan to move permanently to a new state and want to get away from taxes in the state you are currently in, you will need to establish legal residency. The definition of legal domicile varies depending on the state. Essentially, your domicile is considered your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
You will need to find out what the rules are for your new state to establish legal residency. If not done properly, your old and new states could claim you owe state income taxes if you didn’t successfully terminate domicile in the old one. In addition, if you die without clearly establishing residency in just one state, both the old and new states could claim that your estate owes income taxes and any state estate tax.
We recommend you establish residency as soon as possible. The longer you wait, the more steps it may take and the easier it will be for your old state to still claim you as a resident for tax purposes.
Here are some ways to establish residency in a new state:
- Sell your home in the old state, or rent it out to an unrelated person,
- Buy or lease a home in the new state,
- Change your mailing address at the post office,
- Change your address on legal documents such as passports, insurance policies, will or living trust documents, etc.
- Register to vote,
- Get a driver’s license and register your vehicle in the new state, and
- Open and use bank accounts in the new state (close accounts in the old one).
If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state.
Do your research
Before deciding where you want to live in retirement, do some research. A good place to start is by checking out the IRS’s State and Local Taxes page, www.usa.gov/state-taxes. If you have an estate, contact us and we can help you plan to ensure there are no surprises in your new state.