Matter & Substance
  June 6, 2023

Tax Considerations for Retirees: Is Relocating to Another State the Right Move?

As retirement approaches, there’s a lot to consider. Many individuals contemplate a change of scenery and want to move to a different state in pursuit of a more relaxed and fulfilling lifestyle.
While the allure of a new location can be strong, it’s crucial to consider the potential tax implications that come with such a move. Understanding the tax landscape of your destination state is essential to make informed decisions and maximize the benefits of your golden years.

What are the applicable taxes?

It is important to calculate the potential impact on your income and determine whether the lifestyle advantages of your desired location outweigh the higher tax burden. For example, some states don’t tax wages, but they do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions, and Social Security payments.

Before deciding where to move, you should consider the following:

State Income Taxes: One of the most significant factors to consider when relocating in retirement is the state's income tax structure. By moving to a state without state income taxes, retirees can enjoy substantial tax savings, as they will no longer be subject to state income taxes on their retirement income, including Social Security benefits, pensions, and withdrawals from retirement accounts.

It may seem like a good option to simply move to a state with no personal income tax, but you should consider all of the taxes that can potentially apply to a state resident. If the state you’re considering has an income tax, look at what types of income it taxes.

Property Taxes: Retirees often downsize their homes or seek more affordable housing options in retirement. Property taxes can vary significantly from state to state, and even within different localities. Some states offer property tax exemptions or discounts for seniors or veterans, which can provide substantial savings.

Additionally, states may differ in how they assess property values and calculate property taxes. Understanding these intricacies will help you plan your budget more effectively and avoid any surprises.

Sales Taxes: Another aspect of the tax landscape to consider is the sales tax rate in your potential new home. While sales tax may not be as impactful on your retirement income as income or property taxes, it can still have a noticeable effect on your day-to-day living expenses.

States with higher sales tax rates may increase the cost of goods and services, impacting your purchasing power. For example, some states exempt or lower the sales tax on certain essential goods, such as groceries or prescription medications.

Estate Taxes: Estate taxes, or inheritance taxes, are another important consideration for retirees planning to relocate. Some states impose estate taxes on the transfer of assets upon death, while others do not. If your estate is substantial, moving to a state with no estate tax could result in significant savings for your heirs.

It is worth noting that estate tax laws can be complex, and federal estate tax rules apply regardless of your state of residence. For 2023, the gift and estate tax exemption is $12.92 million ($25.84 million per married couple).

How do you establish domicile?

If you make a permanent move to a new state and want to make sure you’re not taxed in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

When it comes to domicile, each state has its own rules. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you establish domicile in the new state but don’t successfully terminate domicile in the old one. 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.

The more time that elapses after you change states and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state are to:

  • Change your mailing address at the post office

  • Change your address on passports, insurance policies, will or living trust documents, and other important documents

  • Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party)

  • Register to vote, get a driver’s license and register your vehicle in the new state

  • Open and use bank accounts in the new state and close accounts in the old one

When contemplating a move to another state in retirement, being aware of the tax implications is crucial for safeguarding your financial well-being. Researching the tax and domicile laws of your prospective destination will empower you to make informed decisions and maximize your retirement savings.