Retirement Relocation: Avoid Letting Tax Issues Catch You by Surprise

Jonna S. Brown, J.D., Senior Trust Officer, First Republic Investment Management & James Meany, Regional Managing Director, First Republic Bank

August 26, 2016

For many pre-retirees, the next phase of life may include moving to a different state — whether to take advantage of a warmer climate, be closer to family, or to take advantage of more favorable state tax laws and a reduced cost of living. In fact, three out of five Americans would like to spend their retirement years in a different city or state, according to a 2015 Bankrate survey.

If you fall into this category, you’re probably contemplating where you want to live, what type of home will suit your retirement needs and how you’ll meet new friends. When considering an out-of-state move, you should also be mindful of many other considerations including how varying tax rates in a new state can affect the taxes you pay on your Social Security income, real estate and estate taxes upon your death.

Follow these tips to ensure that you make a clean break from your home state — and make the most of the advantages your new state has to offer.

Consider the state income, property and estate tax ramifications

Taxes may not be the primary reason for your decision to move, but as you prepare for retirement, investigate how your new state addresses state income, property and estate taxes. Depending on where you land, you might find that your move also offers you some additional tax advantages or, conversely, results in a higher tax bill. For example, Florida, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming don’t have state income tax, while California and Oregon do. Other states, such as Mississippi and Pennsylvania, don’t take tax distributions from retirement accounts or income from public or private pensions. And a few states even offer retirees special tax breaks.

But state income tax is just one piece of your tax picture. Beyond income, it’s important that you determine how your new state handles estate taxes. For example, Oregon only exempts estates valued at less than $1 million from its state estate tax, an exemption that is significantly lower than the $5.45 million federal estate tax exemption. Other things to consider include the potential tax ramifications of a move, such as whether a state has sales tax and the impact of property taxes. You can use this state-by-state guide to help assess the tax effects of your retirement move.

Firmly establish your residency

Once you’ve made the big move, it’s time to officially become a resident — and leave little room for your former state to question whether you really left. This is true even if you plan to travel frequently between your new and former home: If it seems like – on paper – you’re still residing in your previous state, you may find yourself owing state taxes there.

Some of the ways you establish residency are intuitive. For example, obtain a driver’s license and vehicle registration, register to vote and establish bank and other financial accounts with institutions in your new home state. To state and federal tax agencies, these actions denote your intent to permanently reside in your new state and make it harder to argue that you maintain residency in a former one.

However, there are also some finer points that require your attention. For example, you may want to file a Declaration of Domicile in your new state. This is a legal document that evidences your intent to make the state your permanent residence. When filing your income taxes, make sure you use your mailing address in your new state. Also, you’ll want to update your will to declare that you are a resident of your new state and then execute the documents in your new state as well.

Break up with your former state

Establishing residency is one aspect of your move, but you should also plan to cut as many financial ties with your old state as possible. This can get complicated if you have businesses that you plan to continue operating in your former state, or if you still generate income there. Talk to an attorney or CPA to sort out what makes the most sense from a tax perspective.

Then, do what you can to prove that your new state is your new residence. For example, some states will require that you spend a certain number of days in a state in order to be considered a permanent resident. Make sure you know what the time requirement is and meet it in your new state. Conversely, check whether your former state has a similar requirement and make sure you don’t spend so many days there that you could still be considered a resident.

You should keep a detailed calendar that shows your whereabouts in the event you do need to prove that you were in your new home state for enough of the year to prove residency. In addition, consider joining local social organizations in your new state, such as a country club, to further signal your commitment – and perhaps make some new friends in the process. Lastly, if you intend to keep a home in your former state, talk with your attorney about how your new home should be titled and whether or not it should be greater in size or value, as this will demonstrate your intent to live in your new state.

A retirement move can offer an exciting, fresh start to your next phase of life. To help make this major life change as smooth as possible, pay attention to the tax ramifications and residency requirements to ensure that unexpected tax bills don’t mar the potential opportunities of your golden years. 

The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice.  This information is provided to you “as is,” does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained here.  Clients’ tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.

©First Republic Bank 2016