You might consider a move to a new state for any number of reasons: More temperate weather, a location closer to family members, or perhaps a lower tax bill.
But moving can also have unexpected implications for your finances, including changes to the income, property, sales, and estate taxes you’ll potentially face. It can also possibly make it more difficult for a family member to act on your behalf if you’re incapacitated or cause your heirs to go through a more onerous process to settle your estate. Here’s what you need to know.
When taxes appear in unexpected places
It’s not unusual for taxes to be a major driver in the decision of where to move, especially for retirees, explains Jeffery Wyble, vice president of advanced planning at Fidelity. Nine states levy no personal income taxes whatsoever—including Florida and Texas, 2 states that are seeing a large influx of new residents. When you’re moving from a high-tax state, that change alone can often make a significant difference in your tax bill.
But property taxes and local sales taxes vary enormously across the country, and a state that allows for tax-free income may make up the difference in other ways. For example, New Hampshire, which taxes only dividend and interest income, has some of the highest property taxes, on average, in the country.
Another difference you may find is how your new home state treats your future estate. Seventeen states impose estate or inheritance taxes (Maryland has both). And community property states, which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, benefit from a more advantageous form of the step-up in basis received when one or both spouses pass.
States also differ in their treatment of retirement income, such as pensions, Social Security, and health savings account (HSA) withdrawals. For example, Alaska does not tax pensions, Social Security, or IRA distributions, while North Carolina only excludes Social Security income. Two states (California and New Jersey) tax interest and capital gains earned in HSAs.
Think about your portfolio too. If you earn state-tax-exempt income from municipal bonds issued in your former home state (or through a bond fund holding them), the interest might be subject to state taxes in your new home state.
Dividing your time can be a tax headache
If you’re considering moving and keeping a foothold in another state—perhaps dividing your time depending on the season—keep in mind that this can add a layer of tax complexity. With any ambiguity over where you live, your former home state may continue to try to tax your income. So it usually makes sense to establish a new legal home base, especially if you’ve moved from a high-tax to a low-tax state, suggests Wyble.
While state laws on residency can vary, the key concept to understand is the difference between a residence and a domicile. You have only one domicile, and it’s your permanent home tax-wise. Other homes, like a ski house or the place you spend the summer, are residences. To establish a domicile, you generally need to follow the 183-day rule, which states that when you spend 183 days or more within a calendar year in one state, you’re considered a resident of that state and will be taxed as one. You don’t have to spend 183 days in your new state to establish it as your domicile—you just need to avoid spending 183 days in any other single state.
States like New York and California can be persistent in claiming former residents as their own, so it’s important to take steps to establish your new domicile, Wyble explains. That includes updating the address on all your financial accounts, switching to a local bank, getting a new driver’s license, re-registering your vehicle, canceling old club memberships, and establishing relationships with new medical professionals. You can also file a declaration of domicile if you move to Florida or another state that offers this option.
“It’s not to say you can never visit New York if you move away, but you’re trying to establish a domicile in the new state by cutting as many ties as possible,” says Wyble. “If a prior state does an audit, they’ll look for ways to show you may still be a resident of their state.”
To be ready to make your case if your previous home state claims you as a resident, keep a journal of where you spend your days and hold on to credit card statements, cell phone records, and travel documents such as boarding passes, train tickets, and toll receipts.
What moving means for your estate plan
States offer reciprocity, so in theory, your original estate documents should still stand after your move, says Wyble. “If your documents were created correctly, the state you move to should recognize them,” he says. However, given the variation in estate laws between states, Wyble typically recommends revising estate plans to meet the new state rules. For example, there may be restrictions on who can serve as an executor of your estate, power of attorney, or trustee, such as in Florida, where you are required to have a local executor unless you’re related to your current executor by blood, marriage, or adoption. Married couples also should be aware if they are moving to or from a community property state which impacts how a state treats marital property, Wyble notes.
In addition, for practical reasons, you may want to name a new power of attorney or health care proxy. “If, for example, 1 of your 2 children lives in England while the other lives 2 hours away, it’s probably better for the child who lives closer to have power of attorney in case you get sick or injured and need someone to make decisions fast,” Wyble says.
If you plan to split your time between more than one state, you may need to double up on some of your estate-planning documents too. While you’re only allowed to have one will, you’re best off having separate health care proxies and powers of attorney for each state, to make sure your wishes are honored.
Finally, when you own property in more than one state, a local attorney can advise you on whether it makes sense to transfer these assets into a revocable living trust. By doing so, you could help ensure that your estate doesn’t have to go through probate in 2 states or even be subject to estate taxes in your former state where you still own a home.
The bottom line
Moving can have unexpected implications for your taxes and can also create changes to your estate-planning needs. If you’re considering a move, consult with a local attorney or other professional to review—and potentially update—your estate-planning documents, including your will, power of attorney, living will, and health care proxy.