You may have considered a move out of Wisconsin in retirement. Some seek warmer weather, others seek the ability to take on a new adventure, while some seek the ability to live in a state without income tax. From a tax standpoint, moving to a new state may not be as seamless as it appears.
States Without Income Tax
Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — have no income tax, with New Hampshire and Tennessee only taxing interest and dividend income at a state level.
These are all beautiful states with a lot to offer. Many people consider relocating to one of them to enjoy the weather, landscape and sites, as well as the tax advantages they offer. In addition to the elimination of income tax, they may also offer the elimination of estate and inheritance tax.
Why Would You Want To Relocate To A State Without State Income Tax?
When you were working, you received a tax benefit (reduction in taxes paid) when you deferred part of your income into your retirement plan. By moving to a state without income taxes, you can save on the tax you are required to pay when spending the funds in retirement. Sounds like a genius plan, right? Hold on, it is not that easy…
Residency Is Not Just An Address
Let me disclose that the validity of your residency will be scrutinized. In order to become a resident, it is not simply visiting or time spent in a particular location. If you maintain a home in the previous state, it will not only be the number of days you are in the non-tax state that will be examined, but other characteristics of your move. These could include the number of days spent in each location, the nature of your home in each location, and the fact that you are maintaining a home in another (taxable) state. It is not as easy as a “check list” of items that need to be done to go from a taxable state to a non-taxable one, as these states do not want to provide information on how to conduct potential tax evasion schemes. New York and California are known as particularly aggressive in pursuit of former residents who’ve moved to places like Florida and Nevada. With advances in technology, states and the IRS have a much greater ability to monitor the validity of these moves.
As soon as possible after your move to the new state, you should change your driver’s license, car registrations, voter registration and mailing address for all bills and financial statements. When changing your address, this is not simply forwarding your mail; rather it is contacting the banks and financial institutions to let them know your new residential address. You may also need to file a non-resident return to your old state if you earned any income there.
Insurance costs for your vehicle and home in these states will differ from your current rates. Insurance rates are based on loss ratios, and some states, such as Florida, have higher rates on homeowners insurance due to natural disasters causing more devastating, higher payout claims. Registration on your vehicle may not be a flat rate like it is in Wisconsin, but higher because these states may register vehicles based on the value of the asset.
As you may realize, there are many factors that will weigh on your decision to move to a state without state income tax. Beyond the financial measures, there are also things to think about like proximity to family and the burden of establishing a new life — both with friends and from a financial records point of view. Moving to a new state does not mean you have to cut all ties with your home state; but establishing residency will require you to make substantial efforts to prove your intentions are permanent and a basis for redacting residency in your former taxable state.