High-earners residing in states such as California, New York, and Minnesota, known for their high income taxes, will often consider the option of relocating in order to save money. Certain patterns of movement are particularly common, such as moving from New York to Florida and California to Nevada and these differences influence overall interstate moving patterns (Tax Foundation, 2023). While this can be a viable strategy to reduce your tax bill, it's crucial to approach such a move with careful planning and consideration. In this blog post, we will explore some important factors to keep in mind before you make the move.
1. Consider the ROI
The first thing that needs to be considered is whether or not sufficient savings can be made to make the move worthwhile. If you are residing in a high-income tax state, but only paying a few thousand dollars in tax per year, it’s unlikely that selling your house and hiring a mover will be worth your while. If, however, you are paying tens of thousands in income tax every year, it may make sense for you to make the move.
2. Evaluate the overall tax landscape
Before packing your bags and bidding farewell to your current state, it's important to understand the wider tax implications of your planned move. While lower state income taxes can certainly be appealing, it's crucial to consider the overall tax structure of the state you're considering making a move to. Consider not only income tax rates but also property taxes, sales taxes, and any other applicable levies. A state with low or no income tax may compensate for it with higher property taxes or sales taxes. Therefore, do your research and consult with a financial advisor to gain a comprehensive understanding of the entire tax landscape of your chosen state before making a final decision.
3. Analyze the cost-of-living
Taxes are not the only factor affecting your overall financial picture. The cost of living in your prospective new state should also be carefully examined. Consider housing costs, healthcare expenses, education, transportation, and everyday goods and services. While some low-tax states may offer a more affordable cost of living, others may have higher housing costs or a very high rate of inflation. Creating a detailed budget and comparing it across potential locations will help you assess the true financial impact of your move.
4. Research employment opportunities
Relocating to a state with lower taxes might seem appealing, but it's important to evaluate the employment landscape in your chosen destination. Research industries, job growth trends, and the availability of positions in your field. It's also wise to consider the potential impact on your career advancement and professional network. Sometimes, the high-paying job opportunities in high-tax states can offset the tax burden, so ensure that your new location can offer comparable or better career prospects before making a move.
5. Think about your long-term financial planning
Moving to a new state involves more than just short-term tax savings. You must consider your long-term financial goals and how the move aligns with them. For example, if you're planning for retirement, analyze the tax implications for your retirement income, as well as the availability of retirement-friendly benefits such as exemptions or deductions. Also, take into account estate taxes and inheritance laws, as they can significantly impact your financial planning down the line.
If you decide to make the move
Moving out of a high-income tax state to save money can be a sensible decision, but it's vital to approach it with careful consideration and planning. If you work through the numbers, consult a financial advisor with expertise in tax and residency and you find that making the move would be beneficial, there are a number of things you can do to make the transition an easier one.
First, you need to bear in mind that often it’s not as simple as packing your bags and moving across borders. If, for example, you decide to make the move from California to neighboring Nevada in order to avoid California state income taxes, you may find yourself at the center of a residency audit and still liable to pay taxes in California. Why? Well, California defines a resident as any individual who meets either of the following:
- Present in California for other than a temporary or transitory purpose.
- Domiciled in California, but outside California for a temporary or transitory purpose.
Domicile and residence
To understand this, you need to know how residency status determination by tax authorities. In our example, of an individual moving from California to Nevada, tax authorities will seek to ascertain both ‘domicile’ and ‘residence’. In California, your domicile is defined as the place where you establish yourself and your family, with the intention of making it your true, fixed, permanent home and where you intend to return after an absence. The term “resident” includes any individual who is: (a) in California for other than a “temporary or transitory purpose,” or (b) domiciled in California, but physically located outside California for a “temporary or transitory purpose.”
The rules around residency can get very complicated very quickly. So even if you have made the move to Nevada, if you maintain a residence in California and tax authorities deem that to be your ‘true and permanent place of residence’, you can be liable to pay California state taxes.
Recommended actions when making a move
In order to clearly demonstrate that you have made the move to Nevada and cut ties with California, a financial advisor may make some of the following suggestions to clearly demonstrate your new status as a Nevada resident and prepare for a tax audit.
- Cancel your California driver’s license and register for a new one in Nevada.
- Cancel memberships or services such as bank accounts, gym memberships and clubs in California and join new ones in Nevada.
- Register for medical and other professionals such as doctors, dentists and attorneys in your new state
- Vote in Nevada
- Hold holiday family gatherings in your new state
- Consider using an app that tracks and can help prove your location and days within each state such as Monaeo
This is not a comprehensive list and it is always recommended to seek advice from a tax professional with expertise in residency in order to decide a course of action for your particular situation. You will need to, along with your financial advisor, analyze the tax differences, cost of living, employment opportunities, and long-term financial implications before making a final decision. If you do choose to make the move, knowing the rules and leveraging technology to track your location can prepare you for an audit, minimize the chances of facing unnecessary tax liabilities and protect your financial wellbeing.
Nothing in this article should be considered or construed as tax advice. Monaeo does not dispense tax advice and always recommends that taxpayers consult their accountants or lawyers.