What are the tax implications to consider if you’re moving from one state to another?
Each state has a unique set of taxes, such as property, sales, estate or inheritance, and income tax, that apply to its residents. The Tax Cuts and Acts Job put a $10,000 limit on the state and local tax deduction, effectively making the state tax more expensive. Combine that with some of the largest employers suggesting that jobs can be done remotely full-time, and many employees are considering moving from high tax states to lower tax states.
California has the highest income tax rate at 13.3% on earnings over $1M, followed by Hawaii (11.0%) and New Jersey (10.75%). There are currently nine states that have zero state income tax, including Florida, Nevada, Texas, and Washington. A few other taxes by state are:
Washington has an estate tax, while Florida, Texas, and Nevada do not
New York and Connecticut have both income and estate tax
California has the highest income tax rate but no estate tax
Oregon has no sales tax
In this article, we are only focusing on income tax; make sure you research other state taxes, such as property tax and estate tax if you are seriously considering relocating from one state to another state.
Each state has its own rules in determining whether you are a resident of the state. If you are moving to a new state to claim residency, make sure you also update your driver’s license, car, and voter registration, and update your primary address on your bank and investment accounts. Keep a good record of how many days you spent working in your previous state compared to your new state (usually out of 365 days).
What factors determine where your true home is located?
In general, there are two factors: time and intent.
You can be taxed by a state if you spend more than 183 days there, even if your primary home is in another state. For example, if you move to Austin, Texas, but find yourself in California for 183 days out of the year on business, you may owe California state income tax.
Any amount of time you spend in a state can be counted as a day. Let’s use California as an example. If you drove into California for an hour to eat at In-N-Out Burger, that equals one day, even though you were only there for an hour or so. If you flew in for a quick 2-hour meeting, that equals one day. If you spent a Saturday at Disneyland with the family, that equals another day. No matter what your reason for traveling into the state, if you cross the border into the state and spend any amount of time there, it counts as a day spent in state. California may look into your receipts and travel records to make a case that you owe California state tax, so keep a detailed count of your days in different states if you frequently travel to another state.
The second test is intent to ensure that your home is not in one place for general living purposes and in another for tax purposes. Sometimes known as the “teddy bear test.” Authorities may look at where you maintain your most important family, social, economic, political, and religious ties, to determine residency. For example, a judge in 2017 ruled that a former New Yorker that moved to Texas didn’t owe $430,000 of tax for 2009 and 2010 because he had moved his most cherished possession, his dog, to his home in Dallas.
How does working remotely affect one’s taxes?
Similarly, what if you work in one place but choose to live in another because you can now work from home? What happens if you choose to work remotely out of another state for a temporary period of time? Working remotely will complicate state taxes. You generally owe state tax in the state you reside. Therefore, if you moved from San Francisco to Austin and worked remotely for half of 2020, you may only owe California income tax for half of your income. And you generally won’t be taxed on the same income by two states, nor will you avoid tax in both states because you didn’t reside there full time.
Something else to keep in mind, watch out for the “convenience rule" that says unless the employer requires a move to another state, state income tax is based on where the job is located and not where the employee resides. For example, a worker with a New York-based job who lives and works remotely from Florida still owes full income tax to New York. Other states that use the “convenience” rule are Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania.
13 states have provided relief for 2020 due to COVID-19. Pennsylvania, New Jersey, and Washington DC, among others, have announced that they will not tax people working there because of COVID-19.
How can someone looking to optimize their taxes do so by moving from one state to another?
Moving from a high-income tax state, such as California, to a zero-income tax state like Texas, can save a significant amount of income tax. For example, an engineer in San Francisco with a taxable income of $100,000 may owe roughly $6,600 to California, while they would owe zero state tax if they lived in Austin. For a senior engineer with a taxable income of $200,000, they may save close to $17,000 by moving to Austin.
If you are considering a move to a lower tax state in the near future, consider deferring income by contributing to pre-tax 401(k) account and traditional IRAs instead of Roth accounts. If you are offered a non-qualified deferred compensation plan, consider contributing to it to defer income in the higher tax and receiving it when you are in a lower tax state. You may also consider delaying the recognition of capital gains if you plan to move to a state with a lower capital gains tax rate.
Something else to consider is that some states give a state tax deduction for 529 education savings plans. If you’re moving to a state that does, consider delaying the contribution until you can get a tax break.
If you plan to receive Social Security benefits soon, research how it is taxed in the new state you are moving to. While most states do not tax Social Security benefits, 13 states do, including Colorado and Missouri.
Equity compensation, such as stock options and RSUs can be tricky. Which state you owe tax on the day RSUs vest generally depends on where you worked between the date of grant and vest. For non-qualified stock options (NSOs), it generally depends on where you worked between the grant date and the exercise date. Qualified disposition of incentive stock options is generally taxed in the state you sell the shares.
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This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.