Moving to another state is a key part of many peoples’ retirement plans. Some couples want to enjoy better weather so they can participate in more outdoor activities, such as northerners who decide to relocate to Florida or Arizona. Others want to be closer to family members who may live far away.  Also, some retirees decide to move to lower their tax burden. 

There are seven states where individual income is not subject to state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And New Hampshire only assesses state taxes on dividends and interest.  Tennessee repealed its tax on investment income effective January 1, 2021.

Identify all applicable taxes

It might seem like a no-brainer to simply move to a state with no individual income tax. But, to make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.  States with little to no income tax may raise revenue with higher sales and/or property taxes.

If you’re considering moving to a state that does tax individual income, look closely at what types of income are taxed. Some states don’t tax wages but do tax interest and dividends, as noted above. And some states offer tax breaks for pension, retirement and Social Security income.  For example, distributions from 401(k)s, IRAs and pensions are exempt from state tax in Illinois, Mississippi and Pennsylvania. And pension, but not 401(k) or IRA, income, is exempt from state tax in Alabama and Hawaii.

Watch out for state estate tax

The federal estate tax is based on the current value of assets in an individual’s estate.  For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple).  With this exemption at an all-time high, not many individuals are subject to this tax.  However, some states levy additional estate taxes with a much lower exemption, and some may also have an inheritance tax in addition to (or in lieu of) an estate tax.  This is an important factor to consider in your decision-making process.

Establish domicile in your new state

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes state income taxes and any applicable state estate tax.

The more time that elapses after you move to a new state and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. While each state has its own rules, some general ways to help lock in domicile in a new state include:

• • Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party).
  • Change your mailing address at the post office.
  • Change your address on passports, insurance policies, your will or living trust and other important documents.
  • Register to vote, get a driver’s license and register your vehicle in the new state.
  • Open and use bank accounts in the new state and close accounts in the old one.

Also, if an income tax return is required in the new state, file a resident return and file a nonresident return or no return (whichever is appropriate) in your old state. We can help navigate residency issues and advise on the proper filings for your circumstances.

Make an informed choice

Before deciding where you want to live in retirement, do your research and contact your tax professional. We offer advanced planning that can help you avoid unpleasant tax surprises.

Please contact us with any questions.