One of the secondary effects of the COVID pandemic and shift to remote work was an uptick in people moving to a new state. At the same time, many on the cusp of retirement chose to call it a day and relocate for their golden years. While the primary concerns of any move should be finding a place you feel at home, it is important to consider the financial implications as well. In particular, tax and healthcare factors may be quite different in your new home state.
Income Taxes
Taxes vary widely from state to state. While you won’t be subject to taxes in your new state until you move, you may be able to save both time and money by planning ahead.
If you’re moving to Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming – you’re in luck. Those nine do not tax ordinary (paycheck) income. In addition, only two modestly tax some investment income. Washington applies a 7% tax to long-term capital gains, while New Hampshire imposes a flat 5% tax on dividends and interest, though this is scheduled to phase out by 2027.
Timing Matters
When you move to a new state, you are generally required to file a partial year income tax return in each state. States treat these partial returns one of two ways. A total of 24 states use the proportional method to determine how much of your income is taxable in that state. If you spent 40% of the year living in Connecticut, 40% of your income for the year is taxable in Connecticut, regardless of when it was actually earned.
On the other hand, 17 states tax income based on the date that the income was earned. If you move to Arizona on September 17th, only the income you earn from that date until December 31st would be taxable in Arizona.
For those earning regular paycheck income, the difference between these methods may be negligible. However, if you are moving to one of these states and have control over the timing of any of your income streams, you may be able to reduce your tax bill in the year you move.
Example: Take the case of Linda, a retiree moving from Arizona to Nevada (an income tax free state), who is taking IRA distributions of $5,000 on the first of each month. If Linda was moving to Nevada on March 10th, she could delay the January, February, and March distributions, and instead take a lump sum $15,000 “catch-up” distribution on March 15th. This would effectively shield $15,000 from Arizona state-tax, a none of this income was taken while she lived in Arizona.
Similarly, the tax imposed on capital gains differs from state to state. If you are moving to a state with lower tax rates, or preferential treatment for capital gains, you may be able to save money by delaying the realization of those gains.
If you are moving close to year-end, you may be able to avoid filing two returns entirely.
Example: Bill is a retiree moving to from Wisconsin to Georgia on January 28th. He draws $7,000 from his IRA on the first of each month. Like Arizona in the previous example, Wisconsin taxes income based on the date it was earned. Furthermore, if you earn less than $2,000 while in Wisconsin, you do not have to file a state tax return. If Bill had no other income and could delay the January 1 payment until January 31 (when he’s now a Georgia resident), he could avoid the hassle of filing a partial year Wisconsin return entirely.
Understand How Deductions Work in Your New State
Tax deductions and exemptions vary by state, and more than 20 states offer some form of exemption for retirement income, depending on your tax bracket.
As with your federal return, you typically have a choice of taking a standard deduction, or itemizing deductions on your state tax return. However, these amounts differ by state, and how you treat deductions on your federal return may govern what is allowed on your state return.
Example: The federal standard deduction in 2024 for a married couple is $29,200. In order to itemize on your federal return, you must have $29,201 or more in itemized deductions. In Maryland, the standard deduction on the state return for a couple is $5,150. Tony and Lisa live in Maryland and totaled up their deductions, which came to $28,500. As a result, they will take the standard deduction on their federal tax return. They have more than enough to itemize on their Maryland state turn, however, Maryland law states that if you itemize on your federal return, you must itemize on your state return as well. So, they would have to take the $5,150 standard deduction instead.
However, they have an opportunity. If they were to donate $701 to charity, they would now have $29,201 in itemized deductions, and could itemize on their Federal return. This would allow them to itemize on their Maryland return as well, reducing their Maryland taxable income by more than $24,000. So, by giving away $700, they would save more than $2,000 in state taxes.
Property Taxes
Property taxes can differ significantly from state to state, and within different municipalities. The average property tax rate in Connecticut is four times has high as that in Colorado. Many states offer a homestead credit to help reduce your property tax bill, but you must proactively apply for it. If your new state offers a homestead credit you should apply for it immediately and confirm whether you a required to reapply annually. Some states offer automatic renewal once you apply the first time, while others require an annual application.
Estate Taxes
If you are moving to a new state in retirement, it pays to understand state-level estate taxes. At the Federal level, estate taxes don’t kick in for individuals until you clear the $13.61 million exemption. However, 12 states levy their own estate taxes, with exemption levels and tax rates that diverge from the Federal estate tax. For 2024, Oregon has the lowest estate tax exemption, imposing tax once the estate clears the $1 million hurdle. Connecticut maintains the highest exemption at $12.92 million.
In addition, six states impose an inheritance tax. This is a tax that the heirs pay upon receiving an inheritance. Spouses are exempt from this tax, and some states exempt other immediate family members. Maryland is the lone state with both and estate and inheritance tax. The Iowa inheritance tax is set to be phased out in 2025.
Education Planning
Those with children will want to get a handle on in-state tuition rules. While in-state tuition typically applies to schools within your home state, a number of states have reciprocity agreements with neighboring states. These are particularly common in the Midwest and New England, where residents can enroll in out of state colleges in nearby states at a significant discount.
If you are contributing to a 529 plan for a child or grandchild, check to see if your new state offers a deduction for contributing to the in-state plan. Most states that tax income offer some incentive for contributing to the in-state program. Even if you prefer your current out-of-state 529 plan, you can contribute to the in-state plan to get the deduction, and then roll the money over to the main 529 account once per year.
Healthcare
Moving to a new state typically means starting fresh with a new primary care physician and assorted specialists. For those over 65, there’s an added complication when it comes to Medicare.
Medicare Part C (Medicare Advantage) and Part D (Prescription Drug Plans) are run by private insurance companies and the plans vary from state to state. Your current plan may not be available in your new state. Even if it is, the pricing will be different, and in the case of Part D, the list of covered medications may differ as well.
Medigap coverage (Medicare Supplemental Insurance) plans do not vary from state to state with respect to what they cover. Here again, pricing may be different in your new state. As an additional wrinkle, not every plan is offered in every state. Check to see that yours is available, and if not, start researching a replacement.
While Medicare changes can typically only be made during the open enrollment period, moving to a new state qualifies you for a special window to make any changes necessary. This window starts the month before you move, and lasts for three months.
Plan Ahead
The key feature of nearly every one of the considerations above it that action needs to be taken before you move. Tax, healthcare, and education nuances should be understood well before the moving truck pulls up to your new home. Without careful planning you may miss some tax saving opportunities, or the run risk of a nasty surprise.