Relocating? How to Do It with Taxes in Mind

More and more Americans are on the move these days. Remote work is increasingly popular and allows employees the flexibility to not necessarily live where they work. Additionally, tax changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA) limited the important SALT (State and Local Tax) deduction to $10,000 for single and married individuals. That deduction had previously made residing in high-tax states less costly for affluent individuals.

When you combine those two factors alone, it makes sense that people are looking to see where the grass may be greener. There’s also the fact that states may begin adding new taxes to make up for budget shortfalls, or in the case of Illinois, seeking to increase taxes among select taxpayers. So, it comes as no surprise we are getting a lot of questions about relocating.

If you’ve found yourself looking at real estate ads in a different state, it is important that you take a 360-degree view of what moving would mean for you. As attractive as it may seem to pack up your things and move to a state with a more appealing tax scheme, there are other things to think about. If you move, make sure you do so in a way that accomplishes your tax goals.

Be sure to factor the following into your decision-making process.

Taxes Are Not the Only Consideration

Moving to another community is a shock to the system in more ways than one, but moving to a different state will have an even greater impact. Not only do you need to think about the quality-of-life issues involved, but also the implications of owning multiple homes in multiple states. You will need to choose where your primary residence is going to be, and make sure you can prove compliance. Non-tax-related considerations include:

  • Quality of life issues include proximity to family and friends, familiarity with resources, culture, climate, and access to mass transportation hubs for those who enjoy travel. These are just a few things that directly affect your level of satisfaction and enjoyment of life. Moving may leave you feeling isolated and uncertain after years of confidently navigating life at your current address.
  • Availability of state-of-the-art medical care is not something to be taken for granted. Especially if you currently live in an area with major teaching hospitals nearby, you should consider that moving to a more remote location may limit your immediate access to quality health care.
  • Different areas of the country have vulnerabilities to hurricanes, earthquakes, and other types of disasters. If you are moving to an area that has a higher risk for damage due to weather or other natural causes, investigate what your homeowners’ insurance costs are going to be. And consider whether you are willing to live with the potential risk of natural disasters.

The Taxes Worth Considering

If you’ve already included the non-tax considerations listed above and you are still intent on making a move, then it is time to understand what doing so will mean to your economic picture. It’s a good idea to sit down and discuss your plans with your financial advisors long before putting your home up for sale, as you may have second thoughts after weighing the consequences of a move. Among your considerations are:

  • There may be more to a state’s taxes than what you are thinking about. States require tax revenue to support public services, so though you may think you are considering a no-tax state, there is really no such thing. You should review other taxes imposed, such as local sales taxes and real estate taxes, to name a few.
  • If you receive income from a trust or retirement plan, you will need to look into exactly how it is taxed at the state level in the state you’re thinking about relocating to. Every state has its own strategy, and you may not be happy with what you learn.  For example, under current law, Arizona taxes retirement income; Illinois does not.
  • If your compensation scheme includes deferred bonuses or salaries that will be paid out during your retirement, it is important to determine how the state you are considering relocating to treats deferred compensation and how your specific pay will be treated.
  • If you will maintain your current home and employment, beware of special state tax laws that may keep you ensnared in your current home state tax regime. New York, for example,  is aggressively auditing employees that maintain connections to the state and sought to avoid New York state tax.

Made Up Your Mind? Here Are Your Next Steps

Like everything else in life, relocating to another state and making it your primary residence is not as easy as just deciding to do it. It is important that you do your due diligence to make sure that you have complied with everything required of your new home. You need to follow several essential steps in order to reap the tax rewards that you are seeking. Here are just a few of those steps:

  • Change your vehicle registration to your new address
  • Apply for a driver’s license for your new address
  • Register to vote from your new address
  • Find out whether your state requires a “Declaration of Domicile” or similar document, and if so, apply for and file it
  • File your federal tax returns from the new address
  • Obtain property and casualty insurance at the new address
  • File state taxes as a new resident, as well as former state tax returns as a non-resident if you earn any income in that state
  • Adjust all banking records, legal documents, and credit card records to reflect your new address
  • Change the address on your passport
  • Get established with community, professional, religious and social networks associated with the new address
  • Establish relationships with medical providers proximal to the new address

Add contacting the Cray Kaiser office at (630) 953-4900 to your to-do list to make sure that all-important items have been addressed and everything is reviewed and updated with your estate plan.