Tax Considerations When Retiring in Another State

Moving to another state is a key part of many peoples’ retirement plans. Some move to areas like Florida or Arizona for warmer weather. Others want to be closer to family members who live far away.

And some retirees decide to move to lower their tax burden. Seven states don’t have an individual state income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And New Hampshire and Tennessee only assess state taxes on dividends and interest.

Regardless of your reason for moving out of state, here are a few thoughts to consider regarding your tax picture.

Identify all applicable taxes.

It might seem like a no-brainer to simply move to a state with no personal income tax. But you must consider all taxes that potentially apply to a state resident. These could include property taxes, sales taxes and estate taxes.

If you’re considering moving to a state that does tax personal income, look closely at what types of income are taxed. Like we noted above, some states don’t tax wages but do tax interest and dividends.

Others 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. Pension income (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. And 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 your previous state, you must establish legal domicile in the new location. The definition of legal domicile varies from state to state, and each has its own taxation rules. 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.

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 your estate owes state income taxes and 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 you’re still domiciled there for tax purposes. There are several ways to help lock in domicile in a new state:

  • 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 avoid unpleasant tax surprises that could be very costly.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.