When choosing a new state, consider all applicable taxes and save taxes when moving.
There may be different reasons why a person or family would uproot themselves from their homes and move to another state. If the move is due to work and the company is giving a choice between two states, it is a no-brainer to think of moving to a lower-tax state. However, personal income tax is not the only tax to consider. There are other taxes that can potentially apply to local residents including property taxes and death taxes.
The Beach or The Mountains
If there is a choice between the beach, the mountains, and low taxes, the idea of moving to Marco Island, Florida may be compared to moving to Colorado Springs. Why not? Florida is famous for having no personal state income tax. Colorado has a flat 4.63 percent personal state income tax rate.
On Marco Island, the property tax rate is 1.0965 percent of the assessed valuation, which is pretty close to the actual current market value. The property tax bill on a $500,000 Marco Island home would be about $5,500. There is no state income tax bill so the relevant number for comparison with Colorado Springs is 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.
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. A $500,000 home’s annual property tax bill would be about $2,450.
If taxable income is $200,000, the Colorado state income tax bill would be $9,260. Combine this with the property tax bill, it would run up to about $11,710 ($2,450 + $9,260).
Looking purely at taxes, Marco Island comes out well ahead of Colorado Springs especially for those with high income. But $500,000 won’t get much on the beach on Marco Island since the figures are $800,000 and up. There are also hurricanes which are not a factor in Colorado Springs. To be able to make the right choice, time should be spent in both places.
Most Expensive States
Most folks are currently free of any federal estate tax worries because of the very generous $11.58 million federal estate tax exemption that started in 2020. Politics and events may change this but nobody knows how and when.
There are, however, 17 states plus the District of Columbia that impose their own estate tax or inheritance tax. Maryland imposes both.
What is the difference between an estate tax and an inheritance tax?
- An estate tax is charged against the entire taxable estate regardless of who the beneficiaries of the estate are.
- An inheritance tax is charged only against the inheritances received by certain beneficiaries of the estate.
Highest Estate Taxes
Exemptions from the state death taxes are way below the ultra-generous federal estate tax exemption. If a person has a healthy estate and moves to one of the following states, the estate could be completely exempt from any federal estate tax but be badly exposed to a significant state death tax.
- Connecticut – The top estate tax rate is 12 percent. Starting 2020, a $5.1 million exemption is allowed. The exemption is scheduled to increase to $7.1 million in 2021 and $ 9.1 million in 2022 before increasing again in 2023 to match the federal exemption amount. Above $15 million, the tax rate goes to 0 percent.
- Hawaii – The top estate tax rate is 20 percent. Starting 2020, a $5.49 million exemption is allowed.
- Illinois – The top estate tax rate is 16 percent. Starting 2020, a $4 million exemption is allowed.
- Iowa – There is no estate tax but there is an inheritance tax. The tax rate ranges from 5 percent to 15 percent, depending on the size of the estate and the beneficiary in question. Starting 2020, a $25,000 exemption is allowed.
- Kentucky – There is no estate tax, but there is an inheritance tax. The tax rate ranges from 4 percent to 16 percent. Members of the most common class of beneficiaries (surviving spouse, child, parent, etc.) are exempt. Tiny exemptions are allowed for members of other classes of beneficiaries.
- Maine – The top estate tax rate is 12 percent. Starting 2020, a $5.8 million exemption is allowed.
- Maryland – Maryland has both an estate tax and an inheritance tax. The top estate tax rate is 16 percent. Starting 2020, a $5 million exemption is allowed. Maryland also imposes a 10 percent inheritance tax, with the taxable amount based on how closely related the beneficiary is to the deceased.
- Massachusetts – The top estate tax is 16 percent. Starting 2020, a $1 million exemption is allowed.
- Minnesota – The top estate tax is 16 percent. Starting 2020, a $3 million exemption is allowed.
- Nebraska – There is no estate tax, but there is an inheritance tax. The top inheritance tax is 18 percent. Surviving spouses are exempt. Starting 2020, exemptions range from $10,000 to $40,000, depending on the relationship between the deceased and the beneficiary.
- New Jersey – There is no estate tax, but there is an inheritance tax. The top inheritance tax rate is 16 percent. Surviving spouses, parents, grandparents, and direct descendants are exempt.
- New York – The top estate tax is 16 percent. Starting 2020, a $5.85 million exemption is allowed.
- Oregon – The top estate tax rate is 16 percent. Starting 2020, a $1 million exemption is allowed.
- Pennsylvania – There is no estate tax, but there is an inheritance tax. The rate ranges from 4.5 percent to 15 percent, depending on the decedent’s relationship to the beneficiary. Surviving spouses are exempt.
- Rhode Island – The top estate tax is 16 percent. Starting 2020, a $1,579,922 exemption is allowed.
- Vermont – The top estate tax rate is a flat 16 percent. Starting 2020, a $4.25 million exemption is allowed.
- Washington – The top estate tax rate is 20 percent. Starting 2020, a $2.193 million exemption is allowed.
- Washington, D.C. – The top estate tax is 16 percent. Starting 2020, a $5,762,400 exemption is allowed.
The Whole Tax Picture and the State Tax Domicile Issue
Before moving to a new state, the whole tax picture must be considered. For example, the state of Washington may not have any personal state income tax but it has an estate tax that may be very expensive when one passes away.
It is also important to establish a legal domicile when a permanent move to a lower-tax state has been decided so that one can decouple from taxes in the state that one moves from.
The definition of legal domicile varies from state to state but in general, the domicile is the fixed and permanent home location and the place where one plans to return even after periods of residing elsewhere.
The worst-case scenario may be that two states claim for state taxes because domicile was established in the new state but domicile was not successfully terminated in the old state. Plus, when one passes away without clearly establishing domicile in just one state, both the old and new states may claim that state death taxes are owed.
Steps to Establish Domicile
The longer time that elapses after a taxpayer changes states, and the more steps the taxpayer takes to establish domicile in the new state, the harder it will be for the old state to claim that the taxpayer is still domiciled there for state tax purposes. The following steps should be taken to establish a domicile:
- When a taxpayer still spends time in the old state for business reasons, a log must be kept that shows how many days are spent there and how many days are spent at the new location.
- Change the mailing address.
- Get a driver’s license and register a car in the new state.
- Register to vote in the new state.
- Open and use bank accounts in the new state. Close bank accounts in the old state.
- If an income tax return is required in the new state, file a resident return. File a non-resident return or no return in the old state, whichever is appropriate.
- Buy or lease a residence in the new state, and sell the residence in the old state or rent it out at market rate to an unrelated party.
- Change the address on passports, insurance policies, will or living trust, and other important documents.
When choosing a new state, consider all applicable taxes and save taxes when moving.