The Hidden Costs of Moving for Lower Taxes: What to Consider Before You Pack Up and Go

Moving to a state with lower taxes might seem like a great way to save money, especially on income taxes. However, the overall tax picture may be more complicated than you think. While you could pay less in state income taxes, you might face higher costs in other areas.

Here’s what you need to consider before packing up and relocating to another state.

Key Takeaways

• Moving to a state with lower income taxes can save you money, but you may pay more in other types of taxes.
• States with low income taxes often offset the loss by raising other taxes, such as real estate taxes, sales taxes, and personal property taxes.
• Consider all tax implications when moving to a new state.

When You Move to Another State, You Change Your Domicile

When you move to a new state, you’re not just changing your address; you’re changing your domicile, which is your legal, permanent residence. Domicile determines which state you pay taxes in, and it also impacts other legal benefits, such as eligibility for disability or unemployment benefits.

According to Katie Carlson, head of wealth strategy at Bank of America Private Bank, “While you can have multiple residences at the same time, you can have only one domicile,” she said. “There is no single factor that determines whether someone has changed their domicile.”

Steps to Take Before Changing Your Domicile in a New State

If you plan to establish a new domicile in a different state, there are key steps to follow. Carlson recommends the following:

• Own or rent a home in the new state and live there. Spend as much time as possible in the new state and stay out of your old state for 183 days.
• Develop relationships in the new state, including with health care providers, religious organizations, and charitable organizations.
• Obtain a driver’s license in the new state, register to vote in the new state, update car registrations, and update your estate plan to reflect your new domicile–ensure it complies with the new state’s laws and file a declaration of domicile or similar form.

Think Beyond State Income Taxes When Moving

Consider more than getting the best mortgage rate and finding lower state income taxes when moving to a new state.

“State income taxes are often a key driver in changing domicile. Understanding taxes is important, but you can’t let the tax tail wave the dog. You need to make sure moving away from family and friends is worth the new lifestyle and tax savings,” Carlson says. 

A state with no or lower state income tax may recoup that lost income in other taxes.

“Lower tax states will usually try to offset the lack of a state income tax in several ways. Real estate taxes, sales taxes, personal property taxes (cars, boats, etc.) along with generally higher levels of licensing and other official fees are commonly higher,” says Rick Miller, financial planner and investment advisor at Miller Investment Management in Manassas, Virginia. 

“One tip, even though you may not be contemplating buying a new home, realtors often maintain comprehensive lists of locality factors, usually including taxation in all forms. Just ask them for a relocation kit and mention tax concerns.”

The Bottom Line

Moving to a state with no or low state income taxes may save you money on your state tax bill. But there is more to consider like paying more on other taxes such as sales taxes and personal property taxes. So weigh the pros and cons carefully.

To change domicile and the state where you pay taxes, you’ll need to rent or own a home in your new state and stay out of your old state for 183 days. You’ll also want to get a driver’s license in the new state, register to vote, and update your car registrations.