Approaching retirement? 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. When planning for retirement and considering a move to another state, it's crucial to take state and local taxes into account. Establishing residency for state tax purposes can indeed be more complex than one might initially think. Each state has its own tax laws and regulations, and they vary widely in terms of income tax rates, property taxes, sales taxes, and other levies.
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.
Here are key tax implications to retiring in a different state.
Income Tax - Some states have no income tax, while others have a progressive income tax system. Consider the tax rates and how they will impact your retirement income.
Property Tax - Property taxes can vary significantly from state to state and even within states. It's essential to understand the property tax rates and any available exemptions or credits.
Sales Tax - Sales tax rates can also differ, and some states may not have a sales tax at all. Consider how sales tax will affect your day-to-day expenses.
Estate Tax - Some states have an estate tax or inheritance tax that can impact your heirs. Be aware of the state's policies in this regard.
Retirement Income Exemptions - Some states offer exemptions or special treatment for retirement income, such as Social Security benefits or pension income.
Residency Requirements - Establishing residency for tax purposes often involves more than just physically moving to a new state. It may require demonstrating your intent to make the new state your permanent home.
Establish Domicile
It’s important to establish legal domicile in the new location to make sure you’re not taxed in the state you came from. The definition of legal domicile and the rules of it 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.
Avoid the worst-case scenario. If you establish domicile in the new state but don’t successfully terminate domicile in the old one, two states could claim you owe state income taxes. Additionally, if you die without clearly establishing domicile in the new state, both the old and new states may claim that your estate owes income taxes and any state estate taxes.
Here are five ways to help establish domicile in a new state:
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.
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. As always, we can help you make these decisions and file these returns, so contact us when you're ready to make the move.