When the time comes for retirement, you may consider packing up and moving to another state — say, for warmer weather or to be closer to your family. But what you may not consider is the impact of state taxes when you move. Here are the main points you need to know when establishing residency for state tax purposes and why this process may be more complicated than you anticipate.
Identify and Quantify All Applicable Taxes
It may seem like the easy choice would be to simply move to a state with no income tax, such as Nevada, Texas, or Florida. But the easy choice isn’t always the best. First, you must consider all taxes that can potentially apply to state residency, including:
  • Income taxes,
  • Property taxes,
  • Sales taxes, an
  • Estate taxes.

For example, suppose you have narrowed your decision down to these two states: Colorado and Texas. Both are very different when it comes to taxes. Colorado has a flat 4.63% individual income tax rate, and Texas has no individual income tax. You may want to pick Texas for this reason. But the typical property tax rate in Texas is 1.93% of assessed value but in Colorado it is only 0.62%,

Let’ say you are considering Dallas. If you live within the city limits, the property tax rate in Dallas is 5.44%. Therefore, a home assessed at $500,00 would incur an annual property tax of $27,200, compared to $3,100 in Colorado. This difference could potentially scratch off any savings in state income taxes between Texas and Colorado, depending on your income level.

If the states you’re considering moving to have an income tax, also be sure ti look at what types of income they tax. In some states, they don’t tax wages but do tax interest and dividends. While some states offer tax breaks for pension payments, retirement plans distributions, and Social Security payments.

Look out for State Estate Tax
Not all states in the U.S. have an estate tax, but it can be expensive in states that do. Every dollar you pay in state estate tax is on top of any federal estate tax owed, excluding federal estate tax savings from the state estate tax deduction. Currently, estate taxes are levied in the following states:

  • Connecticut
  • Delaware
  • Hawaii
  • Illinois
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Oregon
  • Rhode Island
  • Tennessee
  • Vermont
  • Washington
  • Washington, D.C.

Beware the federal estate tax exemption, which is $5.49 million in 2017. But then again, some states haven’t kept up to pace with the federal level and, instead, levy estate tax with a lower exemption. Also note states may levy an inheritance tax in addition to (or in lieu of) an estate tax.

Establish Domicile
If you make a permanent move to a new state and wish to escape taxes in the state you moved from, it’s vital to establish legal domicile in the new state. The exact definition of legal domicile varies from state to state, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Since each state has its own rules concerning domicile, you could wind up with the 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 state. 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.

So, how do you establish domicile in a new state? The more time that elapses after you change states and the more steps you take to establish domicile in the new state earlier, the harder it will be for your old state to claim that you are still domiciled there. Some ways to help establish domicile in a new state:

  • Buy or lease a home in the new state.
  • Sell your home in the old state or rent it out at market rates to an unrelated party.
  • Change your mailing address with the U.S. Postal Service
  • Change your address on passports, insurance policies, will or living trust documents, and other important documents.
  • Get a driver’s license and register your vehicle in the new state.
  • Register to vote in the new state. (This can probably be done in conjunction with getting a driver’s license.)
  • Open and use bank accounts in the new state.
  • Close bank accounts in the old state.

If an income tax return is required in the new state, file a resident return. File a nonresident return or no return (whichever is appropriate) in the old state. Contact your tax advisor to help with these returns.