What are the tax implications of moving during retirement? And do you need to worry about them? Probably. According to a study by Merrill Lynch and Age Wave, 64% of retirees said they were likely to move at least once during retirement. The top reason for relocating was “to be closer to family.” Coming in a close second was a desire “to reduce home expenses.”

The Tax Implications of Moving During Retirement

Cutting expenses, of course, includes reducing taxes. If you are approaching retirement or already there and considering relocating, you should know all the ways that taxes could affect the cost of living in your new location. Here’s what you need to consider. (For more, see Taxes 101 for Retirees.)

Domicile Versus Residence

First of all, you need to know the difference between your domicile (primary residence for tax purposes) and any residence where you stay part of the year. Generally speaking, if you spend 183 days or more in a state, that is your domicile. Time spent in a new state may not be enough, especially if your automobile registration, driver’s license, doctors and other important contacts and services are all located in your original state of residence. Consider changing these things, including having mail delivered to your new state to cement your status. 

State Income Taxes

When considering a relocation, many people look for a state with no income tax. This may or may not be important, depending on how much of your income is taxed in the first place. For example, if much of your income comes from a Roth IRA, Roth 401(k) or other similar type of account, you won’t benefit as much from living in a state with no income tax.

According to TaxFoundation.org, 28 states and Washington, D.C., do not tax Social Security benefits. The remaining 22 may or may not, based on individual state policies. Check the TaxFoundation website or contact the state tax office for specifics about the state where you plan to relocate. If you made nondeductible contributions to a traditional IRA, your IRS Form 8606, where you reported those contributions originally, will ensure that you don’t pay taxes when you withdraw those funds. (For more, see Can I convert non-deductible contributions made to my traditional IRA to a Roth IRA without being taxed?

Property Taxes

Property taxes can be a trap in a state such as Florida, which has no state income tax but does have high property values and taxes. Property-tax relief in the form of a homestead exemption can help. It’s important to know what relief is available to you and how it is calculated if you buy property in your new state.

If you decide to retain and rent out your old house, thereby owning property in two states, you need to be aware that you will pay property taxes in both states, your homestead exemption will only apply in your new resident state and rent you receive from your old house will be considered taxable income in your old state. (For more, see Investing in Property Out of State.) 

Sales Taxes

Sales taxes represent another form of taxation many retirees fail to consider when looking to relocate. The average state and local sales tax in Texas, for example, is 8.17%, which may make the lack of a state income tax less than impressive. TaxFoundation provides a handy chart of state and local sales taxes to help you put this piece of the tax puzzle together when researching a new place to live.

Taxes on Investments

If you move and change your domicile, you may lose certain investment advantages you had as a resident of your former state. One example could be tax-exempt municipal bonds. Generally speaking, interest paid on bonds from outside your new home state will not be exempt from state income taxes in your new state. 

Depending on the state, your regular 401(k) retirement withdrawals will likely be subject to taxes. States with no income tax are safe, and some other states offer partial tax relief for certain kinds of retirement income. Minnesota, Nebraska, Rhode Island and Vermont allow no exemptions for pensions and other retirement income, while Mississippi and Pennsylvania exempt all retirement income, including 401(k)s and IRAs.

Inheritance and Estate Taxes

Although your main concern may be reducing the taxes you pay while alive, your next of kin could face a sharply reduced inheritance if you choose to permanently relocate to a state with its own estate or inheritance tax (in addition to federal taxes). According to TaxFoundation.org, 15 states and the District of Columbia have an estate tax, six states have an inheritance tax and Maryland and New Jersey have both. The state with the highest maximum estate tax is Washington, at 20%. Of the six states with inheritance taxes, Kentucky and New Jersey lead the pack at 16%. 

The Bottom Line

Relocating in retirement is an important but complicated adventure. Experts advise a lengthy (several month) vacation in your newly chosen paradise before making the move permanent. This might be a good time to not only explore the physical location but also to research any of the potential tax pitfalls mentioned above, especially those that might take the luster off your dream and send you exploring in a new direction. 




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