Retiring and moving to another state? Know about possible taxes

When many retire, they want to move to another state for multiple reasons. Before you move, you should be knowledgeable about the state and local taxes of the state/town you’d like to reside in. However, establishing residency for tax purposes might not be as simple as you think.

Finding which taxes are relevant

A big motivation for moving to another state may be no personal income tax. However, many states that don’t tax personal income may have other taxes such as property, sales, and estate taxes.

If your potential states have an income tax, it’s essential to know what types of income are taxed. Several states tax interest and dividends without taxing wages. This is while others have tax breaks in place for pension payments, retirement plan distributions, and Social Security payments.

Estate tax

For 2019, the federal estate tax exemption is $11.4 million, or $22.8 million for married couples. However, depending on what state you’re in, some states levy estate tax with a much lower exemption.  A few states may also have an inheritance tax in addition to, or instead of, an estate tax.

Domicile establishment

If you decide to make a permanent move and you don’t want to pay taxes in the state you came from, you must establish legal domicile in your new state/town. Usually, the definition of domicile is your fixed home location and the place where you go back to, even if you’ve resided somewhere else for a while. However, states may have their own definition of what a legal domicile is, so it’s crucial to investigate those requirements for the state you choose to live in.

You need to be cautious of your original and new states’ domicile rules and follow them to a ‘t’. If you’ve established domicile in your new state but didn’t wholly end domicile in the old, it is possible that both states could maintain you owe state income taxes. Should you have an estate, both the old and new states could also claim that your estate owes income taxes and any state estate tax if you pass away without definitively finalizing domicile in your new state.

Domicile establishment

The longer you’ve been in your new state and the more steps you’ve completed to establish domicile there, it will be more difficult for your old state to assert that you’re domiciled there for tax purposes. There are a few things you can do to assure your domicile status in a new state:

  • Buy or lease a home in the new state and sell or rent your home in the old state. If you choose to rent out your old home, it must be at market price and to unrelated parties,
  • Change your mailing address at your old post office,
  • Change your address on passports, insurance policies, will or living trust documents, and other relevant documents,
  • Register to vote, get a driver’s license and register your vehicle in the new state, and
  • Open and use bank accounts in the new state and close accounts in the old one.

If it’s necessary in your new state to file an income tax return, you should file as a resident. Once this is done, based on which return is applicable, you should file a nonresident return or no return in the previous state.

Make smart decisions 

Retirement is exciting and comes with a lot of well-deserved enjoyment time. To capitalize on your new freedom, do some research before you move and contact us. We can help you avoid unwanted taxes and transition your tax returns to your new state.

CAPATA is a full-service accounting firm located in Laguna Niguel in southern California.