Is It Time To Bust A (Tax) Move?
New federal tax rules may pique an interest in moving to a tax-friendlier state.
Is your heart really in Texas? Florida? Nevada?
The new tax law that went into effect last year may have you evaluating the benefits of moving to a more tax-friendly state, like the seven that don’t collect income tax: Alaska, Florida, Washington, Wyoming, Texas, Nevada and South Dakota. Moving on may have been on your mind in previous years, but there’s a chance that the recent reduction in the amount of your state and local tax deduction may have you rethinking your timeline.
It’s possible that the changes brought by the Tax Cuts and Jobs Act may prompt some higher-net-worth residents of states with higher individual or business tax rates to consider a change in domicile, a place of permanent residence, in an effort to reduce or eliminate their overall tax liability. A provision in the new tax code caps the state and local tax (SALT) deduction at $10,000. Previously, taxpayers could deduct itemized deductions exceeding 2% of adjusted gross income, subject to Alternative Minimum Tax rules.
The deduction limits on mortgage interest and state and local taxes may influence residents of states with high income tax rates, property taxes and property values – like New York or California – to relocate to more tax-friendly states.
Residents of low- or no-income-tax states likely don’t have this issue on their radar. They can take the higher standard deduction of $12,000 for individuals, $24,000 for spouses filing jointly. It’s unlikely they’ll hit the lower $10,000 cap unless they’re planning to add substantially to their real estate portfolios between now and 2025 when the cap is scheduled to sunset.
Note: In addition to getting a new license, finding a new home, registering to vote and changing your address, you’ll also have to keep evidence that your move is legit in the eyes of both states. After you stop paying taxes in the more expensive state, you could find yourself the subject of an audit.
Of course, moving requires many considerations – not just taxes – and the rules around changing your domicile can be complicated, so it’s best to make a decision in conjunction with your financial advisor and a knowledgeable tax professional. The math can get messy because states without income tax may have higher property, gasoline or sales taxes, which can contribute to higher living expenses overall. Multi-state property owners also should learn what qualifies as a permanent home in their state vs. another and how much time you must spend in a state in order to officially change your domicile. The rules can vary greatly – some require as little as 183 days to more than 270.
But if you were already considering a move, the new tax implications may prove a tipping point to helping you make your decision.