Retirement and Taxes

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Considering retiring and moving to another state for the weather, to be closer to family, or both? Certain states may be more attractive than others due to taxes. Some states may have residency requirements for state tax purposes, which may be complicated.

Identify and Quantify All Applicable Taxes
It may seem simple moving to a state that has no personal income tax, such as Nevada, Texas or Florida. However, to make a good decision, you must consider all of the taxes that can potentially apply to a state resident, including:
+ Income taxes,
+ Property taxes,
+ Sales taxes, and
+ Estate taxes.
For example, when considering the two states of Texas and Colorado: Texas currently has no individual income tax and Colorado has a flat 4.63% individual income tax rate. At first glance, Texas might appear to be less expensive from a state tax perspective. Not necessarily. The average property tax rate in Texas is 1.93% of assessed value, while in Colorado it is only 0.62%.

Within the city limits of Dallas, the property tax rate is 5.44% and a home assessed at $500,000 incurs an annual property tax bill of $27,200, if located in Dallas, compared to only $3,100 in Colorado. Depending on your income level, the difference could potentially cancel any savings in state income taxes between those two states.

When considering states with an income tax, evaluate the types of income taxed. Some states, for example, do not tax wages but tax interest and dividends. Some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

Watch Out for State Estate Tax
Not all states have estate tax. Every dollar you pay in state estate tax is addition to any federal estate tax owed, except for the federal estate tax savings from the state estate tax deduction. Currently, estate taxes are levied in:
+ Connecticut,
+ Delaware,
+ Hawaii,
+ Illinois,
+ Maine,
+ Maryland,
+ Massachusetts,
+ Minnesota,
+ New York,
+ Oregon,
+ Rhode Island,
+ Tennessee,
+ Vermont,
+ Washington, and
+ Washington, D.C.
Beware: the federal estate tax exemption is $5.49 million in 2017. Some states have not kept pace with the federal level and, instead, levy estate tax with a much lower exemption. Also, some 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 want to escape taxes in the state you left, it is important to establish legal domicile in the new state. The exact definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and place where you plan to return, even after periods of residing elsewhere.

Since each state has its own rules regarding domicile, you could wind up in the worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but did not 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.

How do you establish domicile in your new state? The more time that elapses after you change states and more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you are still domiciled there for tax purposes.
Some ways to help lock in domicile in the 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.
File a resident return if an income tax return is required in the new state. File a nonresident return or no return, whichever is appropriate, in the old state. Consult your tax advisor regarding these returns.

Make an Informed Choice
Before deciding where you want to live in retirement, do some research and contact a tax professional in the new state you are considering. Taking these steps could avoid making a bad relocation decision when taxes are considered.

Need Guidance and Help?
If you need advice, give us a call and we will be happy to discuss your situation.