Tax Considerations When Retiring In Another State

Moving to another state is a key part of many peoples’ retirement plans. However, not everyone takes in to account all of the tax considerations when retiring in another state.

Some couples want to enjoy better weather so they can participate in more outdoor activities, such as those living up north who decide to relocate to Florida or Arizona. Others want to be closer to family members who may live far away.

Some retirees decide to move to lower their tax burden. There are seven states where individual income is not subject to state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And New Hampshire and Tennessee only assess state taxes on dividends and interest.

Identify All Applicable Taxes

It might seem like a no-brainer to simply move to a state with no personal income tax. To ensure you make a good 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 you’re considering moving to a state that does not have personal income tax, look closely at what types of income are taxed. Some states don’t tax wages but do tax interest and dividends, as noted above. And some states offer tax breaks for pension income and retirement plan and Social Security distributions.

For example, distributions from 401(k)s, IRAs and pensions are exempt from state tax in Illinois, Mississippi and Pennsylvania. However pension, but not 401(k) or IRA, income, is exempt from state tax in Alabama and Hawaii.

Watch Out For State Estate Tax

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy additional estate taxes with a much lower exemption. Some may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish Domicile In Your 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 state income taxes and any applicable state estate tax.

The more time that elapses after you move to a new state 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 include:

  • 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 mailing address at the post office.
  • Change your address on passports, insurance policies, your will or living trust and other important documents.
  • Register to vote, get a driver’s license and register your vehicle in the new state.
  • Open and use bank accounts in the new state and close accounts in the old one.

Also, if an income tax return is required in the new state, file a resident return and file a nonresident return or no return (whichever is appropriate) in your old state. We can help with these returns.

Make an Informed Choice

Before deciding where you want to live in retirement, do your research and contact your tax professional. We can help you better understand the tax considerations when retiring in another state. This will allow you to avoid unpleasant tax surprises that could be very costly.