October 14, 2020 …
You’re thinking it’s time to move to a less scary state. You throw the kids, the critters and of course, grandma in the car and off you go to where the grass is greener.
Perhaps taxes are not the first thing you consider when deciding to move to a different state, but knowing the tax situations of the locations you’re considering for a move could help you save in the long-run.
Consider All Applicable State and Local Taxes
But 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% personal state income tax rate. So, you might reasonably think it would be much cheaper tax-wise 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 about:
- $11,710 in Colorado Springs
- $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.
But, the vibe is still a lot better in Southern Oregon!
Another Case Study
You love the beach. You also love the mountains. And you really like low taxes. So, you are comparing the idea of moving to Marco Island, Florida with the idea of moving to Colorado Springs. Why not? As you know Florida is famous for having no personal state income tax.
On Marco Island, the property tax rate is 1.0965 percent of the assessed valuation, which is usually pretty close to the actual market value. The property tax bill on a $500,000 Marco Island home would be about $5,500.
On Marco Island, the combined state and local sales tax rate is 7.0 percent, which is lower than many other jurisdictions in the U.S., including Colorado Springs.
Conclusions: Looking purely at taxes, Marco Island comes out well ahead of Colorado Springs – especially if you have a high income.
Reality Check: If you want to be on the beach, $500,000 won’t get you much on Marco Island. Figure $800,000 and up. Then there are the hurricanes, which are not a factor in Colorado Springs.
But then again, there’s just that something about Southern Oregon!
Worst States to Die in
With the ultra-generous $11.58 million federal estate tax exemption for 2020 (effectively doubled if you’re married), most folks are currently free of any federal estate tax worries! Events and politics could change this happy situation, but who knows what will happen – or when?
That’s the good news. The bad news: for 2020, 17 states, plus the District of Columbia impose their own estate tax or inheritance tax. The really bad news is that Oregon is on the list. But, the great news is that we are not Maryland. Maryland imposes both. (See chart for state listings).
Exemptions from these state death taxes are way below the ultra-generous federal estate tax exemption. So, if you have a healthy estate and move to one of these states, your estate could be completely exempt from any federal estate tax hit (under the current rules) but badly exposed to a significant state death tax hit.
What’s the difference between an estate tax and an inheritance tax, you may ask?
- An estate tax is charged against your entire taxable estate, regardless of who the beneficiaries of the estate are.
- An inheritance tax is charged against only inheritances received by certain beneficiaries of your estate.
Look at the whole tax picture before concluding that you will be moving to a state that has lower taxes for your specific situation.
As example, the state of Washington has no personal state income tax. Great! But, it has an estate tax that could cost big bucks if you die there. The combined state and local sales tax rate can be as high as 10.4 percent. No so great!
Finally, to make the right call, if you are able to, staycation at the new locale and see if it will be “home, sweet, home.”
One more thing … Defang the State Tax Domicile Issue
If you decide to make a permanent move to another 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!
If you are thinking of moving to another state, please don’t hesitate to ask us for help. As always, we are on your side.
Team Legacy CPA