When you retire, you may think about moving to another state — perhaps because the weather is more temperate or because you want to be closer to family members. Don’t forget to factor state and local taxes into the equation. Establishing residency for state tax purposes may be more complex than you think.
Pinpoint all applicable taxes
It may seem like a smart idea to simply move to a state with no personal income tax. But, to make a wise and informed 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.
If the state you’re considering has an income tax, look at the types of income it taxes. For example, some states don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Check to see if there’s a state estate tax
The current federal estate tax doesn’t apply to many people. In 2023, the federal estate tax exemption is $12.92 million (increasing to $13.61 million in 2024). But some states levy 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.
Make sure to establish domicile
If you make a permanent move to a new state and want to make sure you’re not taxed 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, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’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 taxes.
The more time that passes 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. Five ways to help establish domicile in a new state are to:
Change your mailing address at the post office,
Change your address on passports, insurance policies, will or living trust documents, and other important documents,
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),
Open and use bank accounts in the new state and close accounts in the old one, and
Register to vote, get a driver’s license and register your vehicle in the new state.
If you’re required to file an income tax return in the new state, file a resident return. And file a nonresident return or no return (whichever is appropriate) in the old state. We can help you make these decisions and file these returns.
Make an informed choice
Before calling the moving truck to relocate in retirement, do some research and contact us. We can help you avoid unexpected tax surprises.