Abstract: Many
people might think about moving to another state. However, it’s important to
consider the tax ramifications before doing so. This article urges readers to
identify all applicable taxes in a destination state and recommends being
prepared to meet the legal requirements for establishing domicile.
Consider taxes before moving out of state
With so many people working remotely these
days, it’s become common to think about moving to another state — perhaps for
better weather or to be closer to family. Many retirees also look at an
across-the-border move to better control living expenses. If you’ve found
yourself harboring such notions, be sure to consider taxes before packing up
your things.
Identify applicable taxes
It may seem like a no-brainer
to simply move to a state with no personal income tax, but you must consider all taxes that can
potentially apply to state residents. In addition to income taxes, these may
include property taxes, sales taxes, and estate or inheritance taxes.
If the states you’re
considering have an income tax, look at what types of income they tax. Some
states, for example, 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.
Prepare for domicile
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. Generally, your domicile is
a fixed and permanent home location 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.
The simplest and most
obvious way to establish domicile is to buy or lease a home in the new state
and sell your previous home (or rent it out at market rates to an unrelated
party). Then change your mailing address on passports, insurance policies and
other important documents. Getting a driver’s license in the new state and
registering your vehicle there also helps. Be sure to take these and other
steps as soon as possible after moving.
Do the research
When looking into whether
the grass is greener in another state, do some research and contact us. We can
help you avoid unpleasant tax surprises.