You might be considering moving to another state after retirement, possibly looking to relocate to be closer to family and friends or somewhere where the weather is more appealing. While planning for your move can be exciting, you should take the time to consider the tax implications that come with moving to a new state.
What taxes should you consider?
Maybe you’re considering moving to a state like Florida, with no personal income tax. To ensure you make the best decision for yourself, you should consider ALL potential taxes that could apply. Other taxes could include property tax, sales tax, and estate tax.
If you decide to move to a state with an income tax, consider what types of income may be taxable. For example, some states may exclude wages from taxable income but will tax income from interest and dividends. Other states may offer tax breaks for pension payments, exclusions for retirement plan distributions, and 100% tax-free Social Security payments.
Does the estate tax apply to you?
Even though the federal estate tax does not apply to many, it is something you should still consider. The federal estate tax exemption for 2021 is $11.7 million ($23.4 million for a married couple). Be sure to check the estate tax rules in the “new” state as some states levy an estate tax with a lower exemption and some states also have an inheritance tax/death tax in addition to, or in place of, the estate tax.
What are the procedures to establish domicile and why is it important?
When relocating to a new state where you choose to be a resident, be sure to establish legal domicile in your new state of residence. This helps to ensure you are not taxed in the state you just moved from. Each state varies in the definition of legal domicile; under the general definition, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere. Without properly establishing domicile you could risk paying state income taxes in both states, as well as your estate owing income taxes and any other applicable state taxes in both states after death.
There are some steps you can take to establish domicile in a new state. The longer you have resided in the new state and the more steps you take, the harder it will be for the previous state to tax you based on your legal domicile. Some of these steps include:
- Update your address with the post office.
- Update your address on passports, insurance policies,
- Update your will/trust documents and other important documents under the new state’s rules.
- Buy or lease a home in the new state and sell your home in your previous state (or rent it out at market rates to an unrelated party).
- 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, and
- File a resident return in your new state, and a nonresident return or no return (whichever is appropriate) in your old state. We can help with filing these returns.
Before deciding on a new state to make home, take the time to do some research. We advise you to speak to your Wegner CPAs tax specialist; we can help you to understand the rules and pitfalls and, hopefully, avoid any surprising tax liabilities.