“In this world nothing can be said to be certain, except death and taxes.” – Ben Franklin. This old adage is as relevant today as it was back in 1789. There are essentially two types of taxes in the United States: living taxes and death taxes. If you are thinking of moving to another state in retirement, there are generally three financial questions to consider before you move: What is the state income tax? How much does it cost to live there? Will my estate get taxed when I die?

State Income Tax
There are currently seven states that do not tax the income of its residents (see map below). However, the state tax system is more complicated than that. For example, Tennessee only taxes interest and dividend income. Certain cities charge a separate tax from the state. Such as a New York City resident who may pay an additional 3.876%. Some states exclude pension income from taxation. When considering where to live in retirement, it is important to consider what type of income you will receive as a retiree and how the state will tax your income.
Map of the United States showing Income Tax information

Cost of Living
The cost of living in the chosen state should be another factor to consider. Sales tax, property taxes and cost of goods can add to your overall need in retirement. Texas might seem attractive due to the 0% state income tax. However, Texas has high property taxes coming in at 1.67% (6th highest in the nation). In addition to high property taxes, retirees should also pay attention to sales tax and cost of living. Last year the Tax Foundation published data on the purchasing power of $100 based on the city you live in. For example, $100 is the equivalent to $85.47 in Los Angeles versus St. Louis where $100 is the equivalent to $110.50.

State Estate Tax
Currently, each person can shelter $5.49 million from federal estate tax and anything above that is taxed (the top federal estate tax rate is 40%). Some states have their own state estate tax system. Washington’s state estate tax exemption is only $2 million and the top rate is 20%. Here’s how the numbers might work out: single individual dies with an estate worth $5 million (including life insurance death benefits). Since the estate is under the $5.49 million no federal estate tax is due. However, since this person lived in Washington their heirs will have to pay approximately $370,000 to the state. So escaping one state’s high income tax may come back to bite in the end in a different form of tax.
Map of the United States showing the State Estate Tax per state

Planning for a Move
When planning to move to another state, there are proper steps that need to happen. Otherwise the end result could be taxation and penalties by both states. You must be able to prove the new state will be your permanent home and you don’t have any intent on returning to your former state. This is especially important for retirees with homes in dual states. Determining which one is your domicile will be vital for tax purposes. The following are a few best practices:

Purchase a home in the new state
Change your mailing address
Obtain a new driver’s license
Register your vehicles and register to vote
Establish relationship with local: doctor, dentist and CPA
File non-resident return if there is any earned income in your prior state
Keep a record of the time spent (minimum 183 days)
Have credit card charges and travel records to substantiate time spent

Sources:
Tax Foundation
www.tax.ny.gov
Leimberg Estate Planning QuickView

 

Submitted by Petra Chien, Wealth Strategist, First Bank Wealth Management. Petra may be contacted at (424) 343-5209 or via email at Petra.Chien@fbol.com.