January 3, 2023
Tax rates can be a deciding factor for people considering moving to a new place, especially those close to or at retirement age. People often think about moving to a state where there is no income tax because of this.
Currently, only Alaska, Nevada, Florida, South Dakota, Washington, Texas, and Wyoming do not have an income tax. New Hampshire and Tennessee are two more states that do not have taxable income. But dividends and income from investments are taxed in both of these states.
If you are moving from one of these states without an income tax to one with income tax, there are implications, and you need to plan carefully. In this article, I will help you through all you need to know concerning moving from a state with no income tax to one with income taxes.
If you're moving to a state with an income tax, you need to know the income tax status to manage your income-tax deductions better and prepare for tax time. Each state handles income taxes differently, so you need to know the income tax status of the state you're moving to.
Others utilize marginal tax brackets similar to the federal government's system. You must pay those taxes if you have established residency in a state that imposes an income tax. And if you work in certain states or cities, like New York, you will still have to pay state income tax no matter where you live.
Depending on which state you reside in, you may also have to pay a municipal income tax on top of federal and state income taxes. Local tax rates vary by area. To determine how much local tax you owe, multiply your annual income by the local tax rate.
You should contact your local government if you need to know the area rate. With this information, you can check to see if your company is taking out the correct taxes from your paychecks or if you're self-employed if you're saving enough for tax time.
Moving to a state that has no income tax is like getting a slight raise in pay. This is attractive for places like Washington, Texas, and New Hampshire. However, it might become a two-edged sword if you do not use this marginal increase appropriately.
When estimating your total tax expenses, you must consider the following: Some states make up for not having income taxes by raising taxes on things like sales and property. Also, some government services, infrastructure, or transportation options may not be available in states with no income tax or areas with fewer people, so you may need to add a car payment and car insurance to your monthly budget.
The higher cost of a car can cancel out any possible benefits of not having to pay income tax. If you want to purchase a home in your new state and establish roots there, keep an eye on the property tax rates, which could negate how much you have gained from not deducting income tax.
Regardless of if none of these things apply to you, you should take precautions to avoid lifestyle creep. Similar to how clutter in your home tends to grow and take up all the space it can, your lifestyle might suddenly change if you get a raise. Instead of living a lavish lifestyle, put the extra money into a pension, your monthly needs, or plans for the future.
The following are key considerations when moving from non-income tax to income tax-paying states.
Analyze the state income tax scheme. Since you are moving from a state with no income tax to a higher income tax rate, it may make sense to take some income before you move, such as capital gains on your stock or the exercise of stock options, depending on how much notice you get.
Some states have "recapture" rules that say that if you earn money while working in State A and then move to State B before that money is paid out, State A can say that they are owed their share of the taxes.
If you relocate to a state with a higher tax rate, like California, your take-home pay may be less than expected. Before you sign your relocation and cost of living compensation package, do a quick calculation.
You may need to negotiate a higher income to keep up with your expected living expenses after taxes. Don't forget about property and sales taxes, which vary from state to state. Also, if your employer doesn't pay for your moving costs, they may be tax deductible. Keep all of your receipts and talk to your CPA about this.
Your investment approach may also require modification. If you have tax-free municipal bonds in the state you are moving from, they might not be in the state where you are going. Also, in some places, like South Carolina, you don't have to pay income tax on all of your capital gains.
Now compare this with the state of Nevada, which levies no income tax and does not tax dividends. If you are in this dilemma, talk to a CPA (Certified Public Accountant) to understand investment taxes so that you can change your portfolio holdings as needed. While taxes should not dictate investment strategy, it is good to be tax-savvy.
Revisit your will. State-to-state property tax and probate laws vary. If you migrate, you must revise and perhaps change your will to account for new state regulations. Also, you may need a trust in your new state because of tax, legal, or probate issues.
Also, if you own property out of state, like your old home, that you plan to keep or rent out for a long time, putting it in a revocable trust or limited liability company may help you avoid paying probate fees.
The same advice applies to updating your financial and health care powers of attorney since these forms and the laws that govern them vary from state to state. If you still need to get your property documents in order, this part of your financial plan should be ready before you move.
The cost of living is frequently a crucial component of a company's relocation package. Think about the school system and whether or not you want your kids to go to private school. Consider how much more housing and entertainment will cost.
Tuition may be a significant expense for any family, and if you have never had to pay it before, you should prepare ahead for how to pay these fees. Your school costs may affect where you live, how much you will spend on the house you buy, and your mortgage payment.
All these are cash flow issues, but be cautious not to increase your lifestyle spending so significantly with this shift that you derail your long-term financial plan.
Even though saving for college is a top priority for many working families, and there are many good plans to choose from, it might be best to start putting money into the 529 plan in the state where you now live. For instance, are you eligible for a state income tax deduction for donations to your home state's 529 plans?
Those who move and have children in high school may need to decide between in-state and out-of-state tuition. Student loans can be quite costly to pay back in the long run, so what do opportunities for in-state scholarships look like in the new state you are moving to? This is something you will need to factor in before moving.
Start here as notifying the post office will allow them to forward mail to your new address for a year. Online address updates and start dates are easy. Go to USPS.com/move and tell the post office who is relocating, your old and new addresses, and whether the move is permanent or interim. Identity verification costs $1.10 to avoid fraud.
If you have just moved, you must inform both the Internal Revenue Service and your state's tax department of your new location. There are several ways to let the Internal Revenue Service know that you have moved.
Another option is to update it on your upcoming tax return.
Be sure to promptly notify the Social Security Administration of your benefit status. Visit the "Profile" tab in your My SSA Account and click the "Update Contact Information" link.
After that, you'll be able to change your address with social security and decide when it will take effect. You can also update your residential address by phone by calling the Social Security Administration at (800) 772-5123.
You may easily update your address information by creating a My SSA Account if you don't already have one. If you receive SSI or do not have a U.S. mailing address, you must contact the SSA at the above or your local SSA office.
Other people you need to inform about your move are family and friends, your service providers, online shopping sites, business associates, and magazine and subscription services. This is in addition to life insurance providers, loan providers, your employer, your bank and credit card company, and the Department of Motor Vehicles (DMV).
This article should have given insight into the complexities of moving from a state with no income tax to one with an income tax. The obvious challenge is that every state has different laws governing its tax systems, so you must plan carefully and consult widely before, during, and after your move.
This is why it's best to talk to a professional moving company and mail forwarding service that knows how hard it can be to move from one state to another. They will help you make your move seamless.