Thinking of Moving to a Lower Tax State? Think Again.

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’s not a no-brainer!
You must consider all the taxes that can potentially apply to local residents—including property taxes and death taxes.

One 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.

Say 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.

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.

I know a friend that moved to Oregon from California.  He was not aware that Oregon has a tax estate tax rate of 16% after an exemption of $1,000,000.  California has no estate tax!  That was a big surprise waiting to happen.

Defang the State Tax Domicile Issue

If you decide to make a permanent move to a lower-tax state, it’s important to establish legal domicile there in order to decouple yourself from taxes in the state you came from.

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.

Because each state has its own rules regarding your domicile, you could wind up in the worst-case scenario—with two states claiming that you owe state taxes because you established domicile in the new state but did not successfully terminate domicile in the old state.

Finally, 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. Not good!

Sometime timing is everything

I recently had a client considering selling his corporation in California.  However, if he moved to Tennessee and established residency in that state before selling his corporation, it would save him 100’s of thousands of state income taxes.

We Are Here for You

As always, we are at your service. Should you desire our assistance in discussing the idea in this article or have any tax questions, please don’t hesitate to contact us.

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