Wealth Planning
Home may be where the heart is, but the taxman has other metrics

A rare positive of the coronavirus pandemic has been a fresh perspective. Hours spent at home have offered insights into our loved ones’ habits and schedules. Zoom meetings let us peek into our colleagues’ homes and even meet their families (or pets!).

And many of us discovered we could attend to our professional lives, managing businesses and satisfying clients, without setting foot in the office. Indeed, the utility of telecommuting has raised the prospect of working from a quiet Midwestern estate or a lazily sprawling Florida bungalow.

But there’s a practical element for those considering decamping from New York, San Francisco or other big metro areas: They’re often in states with higher tax burdens. The idea of staying connected while significantly shaving the tax bill is enticing.

Alas, if it were only that easy. Given that there are 50 sets of complex residency and taxation rules, changing states is more complicated than setting up a laptop and an internet connection. It’s essential to understand the tax impacts to avoid headaches or unexpected tax bills down the line.

“Moving to a new state and joining its tax scheme is not as simple as just moving,” says Anne Gifford Ewing, a senior trusts and estates specialist at Capital Group Private Client Services. “There’s more to it than simply counting the days in your new home.”

Professional assistance is invaluable.

Gifford Ewing urges would-be movers to start by finding professional tax advisors. “It’s important to consult advisors as early as possible — ideally, in both the state you’re leaving and the state you’re moving to — who specialize in counseling clients on moves between states and are up to date on the latest audit trends,” she emphasizes.

That can help you avoid pitfalls such as the experience of a couple who moved out of California several years ago, explains Sandra Morelli, a regional director at Capital Group Private Client Services. The couple checked with CPAs in both states and went so far as to sign contracts linking their compensation to their new residency. Even with those measures, California contacted them nearly five years after they’d moved, saying they owed income taxes from the year in which they relocated. They eventually settled with the state, but it was an unpleasant experience, Morelli says.

Wealth strategists within Capital Group Private Client Services can help you quantify the financial impact of moving.

“We’ve done several assessments of the financial merits of moving,” Morelli says. “Sometimes the results are surprising. I’ve had clients move forward with their choice, but I’ve also had them choose an entirely different option. I can’t tell you how many times they’ve thanked us for helping them think through the implications.”

Home is where your driver’s license, voter registration and doctor are.

Though there are no catchall rules for moving between states, there are rules of thumb that can help make the move smoother from a tax standpoint, Gifford Ewing says.

For example, it can help to take steps to show you’re putting down roots in your new state. That’s more for the benefit of your previous state, Gifford Ewing explains, because low-tax states often have more relaxed residency rules. Taking steps to underline your decision can help demonstrate that you’re not shirking your tax obligations with a sham out-of-state address.

“States can ask a lot of personal questions” when establishing where you actually live, says Michael Schmid, a senior wealth specialist at Capital Group Private Client Services. “Where is your dentist located? Where is your spouse? Where are your kids? Your dog? Do you maintain a post office box in your old state? Where are your bank accounts located?”

States with highest income tax rates vs. states with none (including Washington, D.C.)

It’s important to establish a set of facts that demonstrate your residency, Gifford Ewing adds. Registering to vote in your new district and getting a local driver’s license can help show you’re serious. Similarly, selling your old home and purchasing a comparable property in your new state highlight your commitment.

Know your goals and start planning as soon as possible.

Planning ahead and considering your future financial situation are critical to an interstate move. Take the time to develop a schedule, with input from your tax advisors, for your relocation and any significant financial plans.

For example, people often consider moving for tax reasons because they’re expecting a large liquidation event, such as selling a sizable stock position or a business. Gifford Ewing notes that clients too often wait until the eve of a buyout to ask about moving, because they think their new residency can shield them from taxes in their old state.

However, many states have “lookback” periods, some lasting several years, during which they may try to tax income earned after a relocation, she says. Similarly, some states tax income generated in the state — such as by rental properties — whether or not you’re a resident there.

Additionally, a big move can ripple through the rest of your financial planning. Take, for instance, a Roth IRA conversion, a popular way to hedge against potential tax increases: There’s a tension between converting now to avoid taxes on future growth and waiting to convert until you’ve moved to avoid state income taxes, Gifford Ewing explains.

The upshot, she says, is that you should start consulting with your Private Wealth Advisor and tax advisors as soon as you begin considering a move.

Of course, your home isn’t simply a financial asset. Moving is a complex and deeply personal decision.

“When working with clients and wealth projections, it’s often financially favorable to move out of a high-tax state like California to one without an income tax, like Nevada,” Schmid says. “But the thought process includes other factors: ‘I’m going to be leaving my family, I’m going to be leaving the nice weather.’ Often, people decide to stay where they’ve already settled down.”

Morelli adds: “This is a complex decision from a legal standpoint, but also from a personal standpoint. There’s so much to consider. Do you like the area you’re living in? Do you want your home to be part of your legacy? It’s so much more than just a simple tax issue.”

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