Changing State Residency

Written By: Brian Ellenbecker, CFP®, EA, CPWA®, CIMA®, CLTC®

Planning to move is typically a big undertaking. It’s usually an exciting time in your life, but it can also be stressful. Moving to a new state usually adds additional complexities to the process that should be addressed, including how this change can impact your finances. There are many aspects of your financial life, including taxes, estate planning and insurance, that can be impacted when you move to a different state.

Taxes

Taxes will likely look different for you once you start living in a new state. Income taxes, property taxes, and sales tax all can vary widely. Oftentimes, if one state has higher taxes in one category, it may have lower taxes in another category.

Income taxes vary state-by-state. Income tax rates, allowable deductions/credits and what counts as income are a few important items to note as you plan to cross state lines.

Typically, states take one of three approaches to taxing residents’ income: a progressive tax (higher incomes pay higher tax rates), a flat tax rate (the same rate is applied to most income), or no income tax (eight states have no income tax and New Hampshire only taxes dividends and interest).

Looking at how retirement income is taxed in various states provides a great example of how different each state can be. Social Security is tax-free in 38 states (including DC) but is at least partially taxable in 13 states. Pensions are tax-exempt in 14 states but at least partially taxed 36 states. Distributions from your retirement accounts (employer plans like 401(k)s and 403(b)s, IRAs, etc.) are treated differently, also. Outside of the 9 previously mentioned states that don’t tax income, three others exempt retirement distributions completely. Most states carve out at least some exemptions for retirement income, but a few do fully tax those amounts.

Doing some planning prior to when you have to file your first return will ensure you can budget for any taxes owed and also gives you time to make adjustments to your withholding or quarterly payments.

Property taxes are another consideration. Property tax calculations vary widely from state to state, which can have a meaningful impact on your expenses. Property taxes are calculated by multiplying the state tax rate, the property value and the assessment ratio or mill rate (portion of property value subject to tax). These variables fluctuate state-by-state. Because of those fluctuating values, the property tax liability on a similarly valued home can vary greatly.

Sales taxes are assessed on goods and services that you purchase. States each have their own tax rates, but local municipalities may also assess their own tax. If your taxable income is relatively low, but you buy a lot of goods and services, your tax bill could increase in a state with high sales tax but lower income tax. The opposite could also be true. Don’t ignore sales taxes when comparing taxes paid in one state vs. another.

Estate Planning

A state residency change can have significant implications for estate planning. Each state has its own laws regarding probate, estate and inheritance taxes and the legal requirements for wills and trusts. When you move to a new state, it’s essential to review your estate plan with an estate planning attorney well versed in your new state’s laws to ensure that it still meets your needs and complies with the new state’s laws. Doing so is especially important if you are married and move from a common law state to one of nine community property states.

There are a few states that still have an estate tax or an inheritance tax. If you move to one of those states, it’s important to review your estate planning documents to ensure your estate plan addresses those items appropriately.

Insurance

A change in residency can also have an impact on your insurance. You should review your existing coverage to determine if your current coverage meets your new state’s requirements.

For example, different states have different coverage requirements for vehicles. You will want to make sure your current policy meets your new state’s minimum requirements.

Homeowners’ and renters’ insurance can vary and certain types of coverages may or may not be available in certain areas. Also, different insurance companies may offer better or worse pricing in different areas, so it’s always a good idea to get a fresh set of quotes and consider all available companies. For example, if you move to a state that experiences certain types of weather events, like hurricanes in Florida, you’ll want to be sure you account for those types of events. If that type of coverage is new to you, discuss the ins and outs with your agent to ensure all your risks are adequately covered.

Moving to a new state can have wide-ranging financial implications. Your Shakespeare Financial Advisor can help you work through the various issues that you might face and help provide peace of mind as you plan for the big move.