If you’re considering moving to a different state, taxes in the new state may be the deciding factor—especially if you expect them to be lower.
Consider All Applicable State and Local Taxes
If your objective is to move to a lower-tax state, it may seem like a no-brainer to move to one that has no personal income tax. But that can be disastrous thinking!
You need to think about all the taxes that can potentially apply to local residents—including property taxes, death taxes, sales-use taxes, and others.
A valuable Case Study
Texas is famous for having no personal state income tax, while Colorado has a flat 4.63 percent personal state income tax rate. So, you might reasonably think it would be much cheaper taxwise to live in Texas than Colorado if you have a healthy income.
Not necessarily! Here’s why:
- The property tax rate on a home in some Colorado Springs locales is about 0.49 percent of the property’s actual value, as determined by the county assessor. Say you move to one of these areas and buy a $500,000 home. Your annual property tax bill would be about $2,450.
- Assume that your taxable income is $200,000. Your Colorado state income tax bill would be $9,260. Your combined property tax bill and state income tax bill would be about $11,710 ($2,450 + $9,260).
- According to the Dallas Central Appraisal District’s online property tax estimator, the annual property tax bill on a $500,000 home in some Dallas locales would be about $21,200, or about $17,800 if you’re over 65 or a surviving spouse. You would have no state income tax bill.
- In most areas within both Colorado Springs and Dallas, the combined state and local sales tax rate is 8.25 percent, so no difference there.
So the relevant comparison for property and income taxes is $11,710 in Colorado Springs and about $21,200 (or $17,800 if you’re over 65 or a surviving spouse) in Dallas. Just the opposite of what you’d expect.
But if your income is really high, it could be the other way around—assuming you don’t buy a really expensive home in Dallas.
Dealing with the State Tax Domicile Issue
If you decide to make a permanent move to a lower-tax state, it’s important to establish a legal domicile there in order to decouple yourself from taxes in the state you came from.
Although the exact definition of “legal domicile” varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
New York and California have a terrible (and likely unconstitutional) track record in this area. If you forget to move your voter registration, driver’s license, etc. to your new state of residence, these states (New York and California) have successfully taxed your income in the new state of residence! This results in double taxation of your state income.
You have to establish domicile in the new state and terminate domicile in the old state. Clients can email us for a list of methods to accomplish this.
Also, if you die without clearly establishing domicile in just one state, both the old and new states may claim that state death taxes are owed! This does assume a taxable estate that can vary from state to state.
Finally, there can be valid non-financial considerations. The numbers may be at a break-even point, but you might prefer to live in a state that is more friendly toward the 2nd amendment. Some things you can’t put a price on.
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