When you retire, two reasons for prompting the move are 1). better weather or 2). to be closer to family or loved ones. But don’t forget to factor in how state and local taxes may help or hurt you.
Once you decide on a new home state, establishing residency in that state tax may be more complicated than it initially appears to be.
Consider all the state and local taxes in the “new” state
There are 9 states that offer no or low income taxes. These states are as follows:
- New Hampshire
- South Dakota
While it may seem like a no-brainer to simply move to a state with no personal income tax, we strongly advise you to consider all taxes that can potentially apply to a state resident. For example, in addition to income taxes, don’t be caught off guard to learn that you may have significant costs in the new state for higher property taxes, higher sales taxes and/or a state-imposed estate/inheritance tax.
If the states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but will tax your interest income and dividend income. On the flip side, some states will exclude from taxation some or all of your retirement-related income (including your pension income, 401(k) retirement plan distributions and Social Security benefits).
Watch out for state death tax
Under the latest round of Tax Reform, the federal estate tax currently doesn’t apply to many people. For 2019, the federal estate tax exemption is $11.4 million ($22.8 million for a married couple). But some states levy an estate tax with a much lower exemption and some states may also have an inheritance tax in addition to (or in lieu of) an estate tax.
Take steps to establish and document domicile/residency in the 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 income taxes and any state estate tax.
How do you establish domicile in a new state?
The more time that elapses after you change states 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.
Some ways to help lock in domicile in a new state are to:
- 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 address: at the post office, on passports, on insurance policies, on will or living trust documents, and other important documents,
- Register to vote,
- Obtain new state driver’s license and register your vehicle and get new vehicle plates in the new state,
- Open and use bank accounts in the new state and close accounts in the old one.
- If an income tax return is required in the new state, file a resident return. Also, file a nonresident return or no return (whichever is appropriate) in the former state. We can certainly assist you in filing the “former” state return and the new state of the domicile tax return.
- If you travel during retirement, spend as much time during a calendar year in the “new” state (you need to support your home base)
Make an informed choice
Taxes should be a consideration when deciding where you want to live in retirement. For guidance, please reach out to your Wegner CPAs’ tax professional. We can help you avoid unpleasant tax surprises.