Tax considerations when moving to another state
Even though relocations from one state to another have slowed in recent years, roughly 10% of Americans change their home state every given year. However, with the recent changes to remote working opportunities, we predict this number to rise in the following years. One of the primary reasons why people relocate to another state is to improve their tax situation. The fact of the matter is that each state handles taxes differently and that some states allow you to get the best tax debt help more easily. In this article, we will provide you with several key tax considerations when moving to another state, explain all about equity taxes, tax-exempt federal bonds, and state investments, as well as touch base on interest/dividend income and penalties for unpaid taxes.
Tax considerations when moving to a state without income tax
For most people, relocating to a state that does not collect income taxes (Florida, Nevada, Texas, Alaska, New Hampshire, South Dakota, Tennessee, Wyoming, and Washington) can feel like getting an instant pay rise. However, what many people do not realize is that there are significant trade-offs for not having an income tax. Most states try to compensate for the income tax by other means, such as levies, higher property taxes, or higher sales taxes. Therefore, before you start looking for one of the top rated moving companies, you might want to ensure that your relocation is actually going to provide you with tax benefits.
Aside from the tax benefits, you might also want to take a look at public services available in your new state, as well as the state of transportation options and the state of the infrastructure. In fact, many states that do not collect income tax have significant issues in non-metropolitan areas. What this means is that you might need to add some expenditures to your monthly budget. For example, you may need to purchase a car to get around, which means paying for auto insurance and getting saddled with car payments.
Furthermore, you need to be careful about your lifestyle expenditures after you move to another state. Even if you end up saving more money due to a more favorable tax situation, it is easy to start spending more money on luxuries. If that happens, you may find yourself in a situation where you don’t know where your money has gone.
Tax considerations when moving to a state with income tax
On the flip side, if you are moving from a state that does not collect income tax to one that does, you may need to rely on tax budgeting to make your money last. Even moving from one income tax state to another income tax state can be wildly different as far as taxes are concerned, as every single state has its own tax system. They all follow similar rules, but there are subtle changes that make all the difference. For example, you may find that one state has specific tax rules for Airbnb rentals while another treats them as standard businesses. It is in your best interest to get to know the exact nature of the tax law in your new state before you finalize the decision to relocate there.
Furthermore, there are some situations that might not be readily apparent. For example, let’s say that you relocated to a state that does not collect income tax, but your place of employment is in New York. In that case, you will have to pay your taxes in your new state as normal but are still required to pay income tax in the state of New York. Under the current tax laws, it does not really matter where you live when income taxes are concerned; what matters is where your place of employment is.
Aside from state and federal income taxes, you also need to pay close attention to your local taxes. Depending on the area you live in, you might be required to pay a local income tax. The local income tax rate is heavily dependent on your location, and it represents a flat percentage. To calculate your local income tax, all you need to do is multiply your local tax rate percentage by your annual income. You can contact your local government at any time to find out the percentage. Alternatively, you can also google this information but make sure that the source you’re looking at is reliable.
As an added note, be very careful with whom you share your tax information. If a website asks for any of your tax details, think twice before providing them, or you might need to handle tax identity theft in the future. It is always best to deal directly with the proper tax authorities than it is to trust a random site on the internet, after all.
Equity taxes and moving expenses
Among all the tax considerations when moving, equity taxes might be at the top of the list. This is due to the fact that it is quite standard to receive equity compensation when relocating to another state. Most states that collect income taxes will look at your equity compensation as income and will adjust your tax percentages accordingly. This means that you may need to reevaluate your key steps to retirement planning, for example, as your incentive stock options might get taxed more than you’ve anticipated. Furthermore, it is on you to calculate your tax return. Meaning that there is ample room for error.
The best thing that you can do is to find a reputable tax professional from the state you will be relocating to and have them take a look at your tax situation. They will help you make sure that all your calculations are based on “good numbers”. Otherwise, you may find yourself in a quagmire of tax issues. Your CPA will also help you get a clear understanding of your overall tax situation and provide you with advice on how to make the most of your investments.
Tax considerations for moving expenses
If you are relocating from one state to another due to the needs of your employer, chances are that you will receive reimbursement for your moving expenses. The issue is that some of the moving expenses might be tax-free, but most of them are going to appear on your overall income. Therefore, you will want to talk the matter through with both your employer and your CPA. There are ways to boost your tax refund amount by relocating from one state to another, but they are highly specific. Your tax professional will be able to tell you if you qualify for them or not.
Aside from income taxes, equity taxes, and moving expenses, there are a few other tax considerations when moving. Some of the most important include:
- Retirement income
- Tax-exempt federal bonds
- Tax-exempt state investments
- Interest and dividend income
- Penalties for unpaid estimated taxes
- Itemized deductions and federal tax changes
Additionally, if you happen to rent your home in your old state, you will still need to file an income tax return in your old state, despite having relocated. However, you will also need to report the same rental income to your new state. Luckily, your new state will be able to provide you with a tax credit, effectively negating the double dip. Also, if your rental property produced a taxable loss, you may be able to carry that loss to offset future rental income in your old state. Of course, you can still utilize all the available tax breaks for homeowners for your rental property, regardless of where your current residence may be.
Now, let’s take a look at some of the above tax considerations in a bit more detail, starting with:
If you are planning to relocate to a state that collects income tax, you need to know that your retirement income may also be additionally taxed. The exact method of taxing retirement income varies from one state to another, however, as some states provide you with a fixed deduction while others do not tax certain qualified pensions. A prime example of this is the states of Louisiana and Utah, where the former does not tax any pensions that you receive by state. Utah, on the other hand, does not provide any such benefits but instead allows you to deduct a set amount from your qualified retirement income. Furthermore, you may want to consider Roth vs Traditional IRA when moving to another state, as one of them may be eligible for additional tax benefits. Your tax professional will be able to tell you more.
If you happen to be receiving retirement income from a business in your old state, federal law states that your retirement income can only be taxed by your new state. This is yet another thing to consider before relocating.
Tax-exempt federal bonds
If you dabble in federal obligations such as Treasury notes or Series EE bonds, most states will not make you pay income tax on them. However, most states have a different view on the definition of a federal obligation. For example, some states may view federal obligations only as those that are directly backed by the federal government. Other states may tax certain federal obligations under the pretext that they are backed by the government but not in the government. It can all get complicated rather fast to tell the complete truth. The best thing you can do is to hire a tax professional and have them make heads or tails out of the entire situation.
Tax-exempt state investments
You may also happen to have certain investments that are tax-exempt in your old state. Upon moving to another state, this may change, and you might need to pay taxes on any income you receive from your previously tax-exempt investments. What you need to do is carefully review your entire financial portfolio and ensure that you are not losing too much money in new taxes by relocating to another state.
Interest and dividend income
Some of the most important tax considerations when moving to another state have to do with any income you receive from interest and dividends. Generally speaking, you will need to pay interest and dividend income to your new state. You will, of course, need to have permanent residency for this to occur. There is an exception to this, however.
If you happen to receive the interest and dividend income as a part of your business in the old state, both your old and the new state get to tax your income. Luckily, you have the same option as with rental income, which is to ask for a tax credit from your new state.
Penalties for unpaid estimated taxes
The last of the tax considerations when moving has to do with avoiding any tax penalties. This is why it is extremely important to carefully analyze all of your income sources, including retirement and investment income. Since every state has its own tax laws, it is extremely easy to underpay your tax bill when moving to another state. To avoid this from happening, you may want to hire a professional tax consultant from your new state, at least for the first tax year. After that, you will get to know all the intricacies of the new tax system, and you can start filing your own taxes.
Itemized deductions and federal tax changes
The last thing to consider is how your new state might handle itemized deductions and whether they have incorporated the latest federal tax changes. Most states will treat all such deductions as a federal return, but some might allow you only to take advantage of a certain number of deductions. This means that, depending on where you relocate to, you might not be able to benefit from all your tax deductions.
As the last one of the tax considerations when moving, you may want to find out whether your new state is currently on the latest federal changes. Some states have a tendency to “handpick” only the portions of the Internal Revenue Code that is to their liking while conveniently leaving out the new portions that they don’t like.
For more information on state taxes, federal taxes, income taxes, and all the other different tax types, you can always refer to the Consumer Opinion Guide. We can also help you find the top professionals in your new state and help you figure out the best way to protect your income from taxes!