Important Considerations for Moving States for Tax Purposes

The pandemic has changed many aspects of our lives. However, it seems as though the wave of people moving state for tax purposes is a habit that remains. In 2020 alone, 400,000 people in the United States decided to leave their old homes behind and move state for retirement purposes. Thanks to Census Bureau, we can see that the pandemic didn’t stop people from making this retirement decision. 

 

With this in mind, we’ve listed some of the most important considerations when planning your future (and your future home!). Should you move to a tax-friendly state? Let’s take a look! 

 

Income Sources 

 

Primarily, we suggest looking at your income sources and how they will change from now to the future. The reason people often get confused during this research is that each state taxes pension, retirement income, and Social Security benefits differently. While some states tax ALL retirement income, others don’t tax anything at all. Equally, some states offer retirement income credits or don’t tax a certain component of retirement income, such as Social Security. 

 

Before moving, consider how different states tax the sources of income that you’ll rely on when living there. You don’t want to move only to find that your main income sources are taxed more heavily than your previous location. Remember, all states need to earn income somehow. Just because they don’t tax in one area, it doesn’t mean they won’t make up for this loss elsewhere. 

 

One of the themes throughout this guide is going to be research – it might cost time, but it could save lots of money in the long-term. Research is the key to success whether you’re withdrawing from a 401(k) or an IRA, collecting a pension, or preparing to move state. We’ve seen that some states tax all income, and some states tax no income, but your retirement type can also play a role. For instance, some states have special rules for former military workers or teachers. 

 

To avoid all income tax, then there are seven states that allow you this luxury – Wyoming, Texas, Nevada, Alaska, Washington, Florida, and South Dakota. Meanwhile, Tennessee and New Hampshire only tax interest and dividend income. Most other states tax in some capacity, whether it’s some income or all income. 

 

Other Tax Requirements 

 

Initially, people are attracted to these seven states because there’s no income tax – great, this is a free holiday, right? Not exactly, and this is because Texas has higher property taxes than most other states. On the other hand, sales tax is non-existent in Oregon, but the state makes up for it with higher income tax. 

 

With this in mind, you can’t base your decision on income and retirement income tax alone. One wrong move, and you’re paying more tax than ever before because of higher property taxes or another form of tax. 

 

When planning, keep all forms of tax in mind and weigh up the pros and cons to avoid a catastrophe. For example, you should remember the following: 

 

Property tax

Income tax 

Social Security tax 

Sales tax 

Estate tax 

 

To help start your research, know that the following have some of the highest top-income brackets at 8% and above: Oregon, Vermont, District of Columbia, Iowa, Hawaii, California, New York, Minnesota, and New Jersey. Elsewhere, the rate is below 5% in New Mexico, Ohio, Michigan, North Dakota, Colorado, Indiana, Arizona, and others. 

 

Social Security 

 

We’ve alluded to it a couple of times, but does your chosen destination tax Social Security benefits? For example, you’ll pay tax on Social Security in around a dozen different states around the country. You’ll find that most of these either tax at the IRS rate or use AGI (adjusted gross income) calculations to exempt a portion of the benefits. 

 

Your Individual Circumstances  

 

Often, people browse the internet for the ‘right’ decision, but the right decision is the one that considers your circumstances and finances. If you’re planning to live on a fixed income, it might be better to pay income tax rather than high property taxes. Property taxes are highest in Illinois, New Hampshire, and New Jersey. The states with the lowest property tax are generally Alabama, Hawaii, Wyoming, and Louisiana. 

 

It’s normal to want to move to a state with lower taxes, but there’s more to the financial picture than just income tax. If you don’t look at the whole scenario, you could end up with a negligible difference (or even paying more!). You don’t want to save on income tax only to find that your savings are being eaten by sales and property taxes. 

 

When considering a move, you should also look into your potential for tax exemptions, abatement, credit, refund, deferral, and other systems. Do some states offer senior citizens a tax break in certain circumstances? 

 

Let’s not forget, a state with high estate taxes could severely reduce the amount your loved ones receive after you pass. Work with a financial professional to consider your individual needs before making any big decisions. After all the research, it might be that your current location is actually the best one for you financially. 

 

Just because a state doesn’t tax your income doesn’t mean that they don’t make up for this elsewhere!