Americans average 11.7 moves over their lifetime, according to the U.S. Census Bureau (“Calculating Migration Data Using ACS Data,” http://bit.ly/2pRvXxn). People move because of a job, retirement, health, or for any number of other reasons; in view of the new cap on the itemized deduction for state and local taxes, a growing number of individuals might move to reduce their overall tax burden. United Van Lines reported in 2017 (2017 National Movers Study, http://bit.ly/2pPmVSp) that Vermont was the top inbound destination, followed by Oregon, Idaho, Nevada, South Dakota, and Washington (the last three of which have no state income tax). Atlas Van Lines found different moving patterns, but also showed considerable relocation into certain states other than those already listed, including Tennessee (which taxes only interest and dividends now, but will have no tax starting in 2022), Alaska (no state income tax), Idaho, and Maine (2017 Migration Patterns, http://bit.ly/2pOkNdM). This article does not address whether a move to another state is advisable, how to handle the stress of the move, or how to acclimate to a new state’s culture. It focuses on what needs to be considered from the financial, legal, and tax perspectives when a move to another state is made.
Relocating to a new state requires many financial changes. These may include setting up new bank accounts, brokerage firms, and utilities, as well as obtaining new home, car, and umbrella insurance coverage. It may also require getting a new safety deposit box to store valuables.
There may be other desirable actions to take. For example, those who establish residency in Florida can file for homestead exemption; this provides a reduction in property taxes and protection for the home, in case of bankruptcy.
It is vital to ensure that one’s healthcare policy will provide coverage in a new state. Someone with an individual policy may need to take steps to maintain coverage (e.g., complete a new application form) or change coverage. Someone with employer coverage likely is automatically covered in the new state, but this should be verified.
Medicare-age individuals need to consider the type of coverage they choose. For example, a Medicare Advantage plan, where costs are lower when seeing doctors who are in network, is good if a person lives in one place. In contrast, original Medicare works better for someone with multiple residences, as the coverage works in all states. If a person with a Medicare Advantage plan or Medicare Part D relocates, there is a special enrollment period (SEP) to change plans. The length of the SEP depends on whether the plan is notified before the move (see more at http://bit.ly/2IbaE1e).
When a person moves to another state, all personal documents, including wills, trusts, powers of attorney, and healthcare directives and appointments, must be reviewed. While a will executed in one state may be valid in another, differences in state law may dictate a new will. For example, the probate process in some states is more onerous than in others, making the use of living trusts desirable. Also, several states still impose an estate tax, making estate planning important.
When a married couple moves to a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, or Washington (as well as Alaska for couples who opt to treat their assets as community property)—a new legal matter is introduced. On a day-to-day basis, community property laws are invisible; however, when it comes to divorce, death, and taxes, these laws can make a big difference. Spouses who have been used to keeping their assets separate may want to use a postnuptial agreement designed to nullify community property laws. Those with prenuptial agreements should have them.
When a person spends part of the year in more than one state, special attention is required. The will should be made in the state where the person is domiciled; only the most recent will can be probated (regardless of where it is made). It may be wise to have two durable powers of attorney (one for each state) so that there is no confusion when the powers need to be exercised.
The only way to make sure that all legal bases are covered is to see an attorney in each state, or one who is licensed in both states. Any legal documents must be coordinated.
State Tax Issues
Only a handful of states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, and Washington (New Hampshire and Tennessee only tax interest and dividends, and as noted above, Tennessee’s tax will be phased out entirely by 2022). If a person is moving to or from a state with an income tax, then a determination of residency is essential.
Each state has its own rules for determining residency for income tax purposes. For example, Minnesota uses a list of factors to determine residency (http://bit.ly/2Gmu5E6). In New York, residency is determined according to domicile (unless one of two exceptions applies) or the number of days the person is in the state (https://on.ny.gov/2GjqKK1). Accordingly, if a person is domiciled in New York or maintains a permanent place of abode in the state for more than 11 months of the year and spends more than 183 days in the state, the person is a resident of the state.
High-income tax states, including California and New York, aggressively look at former residents they believe are erroneously filing nonresident returns or failing to file any returns. Usually these are individuals who continue to maintain a home within the state, but they may also be relocating during the year. The best way to establish a change in residence is to be prepared with proof. This includes changing voter registration and driver’s license, opening new bank accounts, and other evidence linked to living within a state (see Sidebar). Florida allows a person to file a Declaration of Domicile with the court of the county in which the person resides; even though another state is not required to recognize this declaration, it serves as additional evidence of intent. While these actions are helpful, there is, for New Yorkers, still the matter of the 183 days. Taxpayers should carefully record travel dates for purposes of the 183-day rule. Individuals can log the time they spend in different states using apps such as Monaeo (https://monaeo.com/personal) and TaxDay (http://www.taxday.com).
Checklist of Actions to Establish Domicile
___ Acquire burial plots
___ Become active in local politics
___ Change the primary address for credit card statements, insurance policies, and other bills
___ Change voter registration
___ Consult with doctors and dentists
___ Execute estate planning documents
___ File for homestead exemption (where applicable)
___ Join religious and social organizations
___ List the address on the federal income tax return
___ Obtain a driver’s license
___ Obtain a safety deposit box
___ Open accounts with banks and brokerage firms
___ Register vehicles
___ Use the address on a passport
Even if a person legitimately relocates to another state and establishes domicile/residence there, it does not necessarily mean the person is free of income tax in the former state. Assuming there is an income tax, a person who earns income within the former state must file a return, whether a resident or not. Thus, if a person relocates from New York to Connecticut, establishing domicile in Connecticut but continuing to be employed in New York, that person still must file a New York nonresident income tax return and be taxed on income earned in New York State. Taxpayers should check to see whether there is a reciprocal agreement between neighboring states that that permit residents to not file a nonresident state income tax return. For example, a resident of Virginia who works in Washington, D.C., can file an exemption form to avoid paying taxes in D.C.; if this is done, wages are withheld for, and the person only has to file a tax return for, Virginia. Other states with such reciprocity include New Jersey with Pennsylvania, and Minnesota with Michigan and North Dakota.
Even if no personal services are performed in a state, there may be business or investment income that subjects a non-resident to state income tax. For example, maintaining rental property in a former state continues the obligation to pay in that state.
Under federal law, a state is barred from taxing a pension earned there once the person relocates to another state (Pension Source Tax Act of 1996, P.L. 104-94). For example, if a person earns a pension in California but relocates permanently to Nevada or Texas, California cannot tax the pension. Under this law, the term “pension” includes all types of qualified retirement plans, such as 401(k)s, as well as IRAs. The no-tax rule does not apply to most nonqualified retirement plans, nor to stock options, stock appreciation rights, restricted stock, severance, sick leave, compensatory time, and vacation pay.
Federal Tax Issues
Because the federal income tax applies regardless of the state, rates do not vary. But certain federal income tax rules may come into play.
State and local taxes.
The deduction for state and local taxes may change with a move a taxpayer itemizes deductions [Internal Revenue Code (IRC) section 164]. This is because the person must choose between deducting state and local income taxes or state and local sales taxes. With some moves, such as moving from a state with a high income tax to a state with no income tax but a sales tax, the choice is easy. Of course, with the Tax Cuts and Jobs Act’s (TCJA) new cap of $10,000 ($5,000 for married persons filing separately) on deduction of state and local taxes—including property tax, income or sales tax, and personal tax—the difference between states may be less important from a federal income tax perspective.
Change of address.
When moving, inform the IRS of a change of address by filing Form 8822, Change of Address. If a taxpayer also relocates a business, the IRS should be notified on Form 8822-B, Change of Address or Responsible Party—Business.
Deducting moving costs.
For 2017, it may be possible to deduct certain moving expenses, whether or not the person itemizes deductions (IRC section 217). The TCJA eliminated this deduction from 2018 through 2025.
Navigating the Transition
Beyond financial, legal, and tax issues, there are numerous other personal details that must be attended to, such as finding new doctors, new schools, new churches or other religious organizations, and meeting the neighbors. These issues may be beyond the purview of financial advisors, but sensitivity to the full impact of a move can go a long way in providing valuable services to an individual who is relocating. It may be the difference between whether they remain a client or find new advisors.