How does a move to a different state for employment, retirement, family considerations, or personal preference affect your financial position?
State tax rules differ significantly, and determining residency for tax purposes is often more complex than it initially appears. Before relocating, it is important to evaluate how a change in residence may influence your overall tax obligations.
State Taxes Should Be Evaluated Comprehensively
At first glance, relocating to a state without a personal income tax may appear to be a wise tax strategy. However, a well-informed decision requires reviewing every type of tax that may apply to residents of that state. In addition to income tax, applicable considerations may include property tax, sales tax, and estate-related taxes.
If the prospective state imposes an income tax, review which categories of income are subject to tax. In some jurisdictions, favorable treatment may be available for pension income, distributions from retirement accounts, and Social Security benefits.
In certain states, low- or nonexistent-income taxes are paired with comparatively high property or sales taxes, which may reduce or eliminate the anticipated tax benefit. Even when moving between two states that do not impose an income tax, you should compare the likely property and sales tax costs associated with each location.
Estate tax exposure also deserves attention. The federal estate tax currently affects a small amount of taxpayers. For 2026, the federal gift and estate tax exemption is $15 million per person, or $30 million for a married couple with appropriate planning. By contrast, some states impose estate taxes with substantially lower exemption thresholds, and others assess an inheritance tax either instead of, or in addition to, an estate tax.
Properly Establishing Domicile
If you permanently relocate and want to avoid continued taxation by your former state, you should be sure to establish legal domicile in the new state and end domicile in the prior one. The specific standard for legal domicile differs by jurisdiction. Generally, domicile refers to your principal and permanent home, as well as the place you intend to return to after any temporary absence.
As more time passes after your move, and as you take additional actions demonstrating that your new state is your permanent home, it becomes more difficult for your former state to argue that you remain domiciled there for tax purposes. Five ways that one can be sure to support the establishment of domicile in a new state include the following:
- Update your mailing address with the postal service.
- Revise your address on insurance policies, your will or living trust, and other significant documents.
- Purchase or lease a residence in the new state and sell your former residence or rent to an unrelated party at market value.
- Establish and actively use bank accounts in the new state and close accounts maintained in the former state.
- Register to vote, obtain a driver’s license, and register your vehicle in the new state.
If you are required to file an income tax return in your new state, you should generally file as a resident. In your former state, you may need to file either a nonresident return or no return at all, depending on the circumstances. We can assist in determining the appropriate filing approach and preparing the necessary returns.
Address Tax Planning Before the Move
A move to a different state can change your tax position in ways that are not immediately apparent. Before relocating, consult with us to review the possible income, property, sales, and estate tax consequences. We can help you reduce unfavorable tax outcomes and take full advantage of any tax benefits available in your new state of residence.
