By Matt Mikel, CPA
For Upper Midwesterners, the idea of retiring in another state may sound appealing—especially when certain states offer an escape from both winter and income tax. But the process of calling another state “home” may be more complicated than you think. Here are a few things to consider if you plan to retire across state lines.
Income tax savings only go so far
Retiring in an income-tax-free state may seem like a no-brainer. Keep in mind, however, that other taxes, such as property, sales, estate, and/or inheritance taxes, could be higher than those levied by your current state of residence. What’s more, depending on the area, you could face increased costs of living as well as health insurance. So, even if you save on income taxes, you might spend more overall to live in an income-tax-free state.
Making a permanent move to a new state? Be ready to establish a domicile
You can’t just say you’re a resident of a state; you must establish domicile. Generally speaking, domicile is your fixed and permanent home location. It won’t change, even if you temporarily reside elsewhere.
Some of the ways you can establish domicile include:
- Buy or rent a home in the new state
- Sell your home in the old state or rent it out
- Change your mailing address with the U.S. Post Office
- Change your address on passports, insurance policies, and other legal documents
- Obtain a driver’s license and register your vehicle in the new state
- Close your bank accounts in the old state
Why does domicile matter? The short answer: taxes. For example, say you decide to retire in Arizona. Even though you purchase a townhouse in Scottsdale and consider yourself an Arizona resident, you keep your Minnesota driver’s license and vote in Minnesota. As a result, Minnesota could argue that you owe income tax.
Pay attention to each state’s rules for statutory residency
The tricky thing is, each state has its own rules for what defines a statutory resident—i.e., someone who spends a certain amount of time in the state even if domiciled elsewhere. For example, if you’ve established a domicile in Florida but you spend more than 183 days in Minnesota AND you own/rent, maintain, or occupy an abode in Minnesota, you would be considered both a Minnesota and a Florida resident for tax purposes. (Minnesota allows exceptions to the 183-day rule if you are a military member stationed in Minnesota or if you are a North Dakota or Michigan resident due to reciprocity agreements.)
So, before you decide how you’ll spend your retirement, be sure you’re aware of the statutory residency rules in any state you plan to visit for an extended amount of time.
Your story matters
Changing residency is not just about following a checklist, establishing a domicile, or spending a certain number of days in a state. It’s also about the story behind the change. What circumstances in your life are different than last year? The proper story combined with the proper actions is what justifies a change in residency in the eyes of the state taxing authorities.
Set yourself up for a stress-free retirement
Fun fact: In a recent article, Kiplinger ranked Alabama as the number one state to retire in when factoring in income tax, property taxes, sales tax, and estate/inheritance taxes. Whether you’re planning to retire in the “Heart of Dixie” or elsewhere, be sure to do your homework. Think through the cost and rules that could potentially impact your situation, and plan accordingly. Something else you should know: In the year you move, you’ll need to file part-year resident income tax returns, if applicable, in both the old state and the new state.