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3 Things to Consider Before Moving to a No Tax State

For many people, the desire to cut expenses is a moving experience.

We have clients all around the country. So there’s a pretty substantial discrepancy in how much the people we work with pay in state and local taxes.

If you live in a place like California (with a top state income tax rate of 13.3%), New Jersey or New York, at one time or another, you’ve probably considered pulling up stakes and moving.

But of course you have.

When it comes to relocating, which millions of people do every year, with family, familiarity, weather, the local economy, and other quality of life issues, there’s obviously more to consider than taxes.

But as we age, and all our long-time neighbors, friends and children move away—maybe we decide we can no longer stomach the cold weather or the hot summers—and so there’s less holding us in place.

With that in mind, what are some things you should consider when looking at a move to a low-income-tax-state?

Here are 3.

1) Which states really have the lowest rates?

By the year 2021, eight states will no longer tax income, which includes Social Security. Whether you love the mountains, the ocean, the plains or the desert, you’re covered.

These eight are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire (they do tax investment income)
  • South Dakota
  • Texas
  • Washington
  • Wyoming
  • Tennessee (2021)

But is such a move really worth it? For some high earners, it certainly can be.

I work with a couple who recently relocated 90 miles east to Lake Tahoe, Nevada (on a golf course, no less), and saved $110,000 their first year in state income taxes.

2) But you really, really do have to move.

Please read that heading again, because a lot of people think they’ll rent a studio apartment(or vacation home) one state over and it’ll pay for itself in savings.

Not so fast.

While not exactly a new concept, 2017’s law is creating additional van loads of tax refugees.

Well, if you’re going to move, or own two or more residences—one in a low tax state—it shouldn’t surprise you that you’re going to be watched.

That’s right. The local tax authorities don’t like losing all that income.

But how do they know where you really live?

Time accrued in your new dwelling certainly matters, but most people simply assume that if they spend enough time (for most states it’s 183 days, but for Oregon, it’s 200) in their new location, they’re … well … home free.

But that’s absolutely not the case.

The states (like California and New York) that are losing tax revenue aren’t happy about it. In fact, they are redoubling their efforts to rein in what they consider to be cheats.

If they suspect you of merely moonlighting in another state, they’ll audit your life. That’s right! They’ll look at things such as:

  • Your electric bills
  • Where you are buying “important” things
  • Where you keep items that hold sentimental value
  • Where the bulk of your bank statements, bills, vehicle registrations, club memberships, and licenses are mailed

Just remember that, when it comes to proving residency, the burden will fall on you. And while some people have been challenged on their residency, and even hired an attorney, and won, it’s not something I would recommend.

If you claim your primary home is in a no-income-tax-state, make absolutely certain you can prove it.

3) States with no income tax make that money up in other ways.

There are economists who believe moving to a state just to save on taxes is not only rarely worth it, it’s a bit of a shell game. There are several reasons why.

For instance, when you combine local and statewide sales taxes, at 9.46 percent, Tennessee has the highest rates in the country (which is more than double the sales tax rates of Hawaii).[1]

And not only does New Hampshire have higher property taxes than any of its neighbor states, they have some of the highest in the nation. And, in Washington state, to offset the lack of state income tax, you’ll pay $.49 per gallon in gas taxes (which is the second highest in the country).[1]

And while Alaska and Wyoming offset the lack of state income tax revenue because they have plentiful natural resources (the coal and oil industries pay a lot of taxes to operate there), the fact that services are so remote means they still have some of the highest median cost of living rates in the nation.

Conclusion

I don’t know anyone who wants to waste money.

But while keeping an additional 10% of your income every year sounds terrific, you didn’t work your tail off for 40 years just so you could live someplace that will never feel like home.

It could be a compromise, at best.

Think long and hard before you become a tax refugee. While a situation where someone saves $100,000 merely by moving sounds like a no-brainer, I’ve also seen people spend tens of thousands of dollars to relocate, only to hate it and move back a year or two later.

[1]https://www.bankrate.com/finance/taxes/state-with-no-income-tax-better-or-worse-1.aspx

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