Financial Planning Considerations Before Changing State Residency
Written By: Brian Ellenbecker, CFP®, EA, CIMA®, AEP®, CPWA®, CLTC®
Changing your state residency can be an exciting endeavor, whether you’re relocating for retirement, family, lifestyle, or career opportunities. However, a move across state lines can also affect your financial situation, as each state has its own tax laws, insurance regulations, and estate planning rules. Taking time to evaluate the financial impact of your move before establishing residency can help you avoid costly surprises later. Let’s examine some of the most common issues you might run into.
State Income Taxes
Differences in state income tax rules will likely be one of the things that impact your financial situation the most. There will almost certainly be differences in tax rates, deductions, and credits. Consider the following:
1) Does your new state have state income tax?
2) Are tax rates higher or lower?
3) Are there particular deductions or credits that you’re gaining or losing?
4) How are retirement and investment income taxes?
Beyond rates, deductions, and credits, tax rules themselves can and do vary. For example, if you’re retired and collecting Social Security, eight states still at least partially tax Social Security income. There could also be variations in how other retirement income, such as IRA, 401(k), and 403(b) withdrawals or pensions, are taxed. Some states exempt all or part of retirement income, while others offer little to no tax breaks. If you’re receiving a pension from a state or local government and you live in that same state, sometimes some or all of that pension could receive a tax break. That may not be the case if you move out of that state.
The taxation of investment income, particularly dividends and capital gains, can vary by state. If you anticipate selling a business, exercising stock options, or realizing a large investment gain, the timing of your move could affect your overall tax liability.
Estate and Inheritance Taxes
Beyond income taxes, some states still impose estate and/or inheritance taxes. These rules often differ substantially from federal estate tax laws and may apply at much lower asset thresholds. Higher-net-worth individuals need to review beneficiary designations, trust structures, and gifting strategies to ensure their estate planning documents are updated to align with the new state’s rules.
Insurance Considerations
A move to a new state is also a good opportunity to review your insurance coverage and confirm that your policies still meet your needs.
Review your health insurance. If you’re on Medicare and have a Medicare Supplement/Medigap plan, that coverage most likely will continue to work well in your new location. If you have Medicare Advantage or are covered through a private health insurance network, you may need to select a new plan for access to local providers and hospitals.
Your homeowners, auto, and umbrella insurance policies should also be reviewed after relocating. Insurance requirements and risk factors vary by state, and your current coverage may no longer provide adequate protection. Make sure you are covered for regional risks such as flooding, hurricanes or wildfires.
Establishing Residency Properly
In addition to financial planning considerations, it is important to properly establish residency in your new state. States may look at several factors when determining residency status, including:
1) Where you spend most of your time
2) Voter registration
3) Driver’s license and vehicle registration
4) Mailing address
5) Homestead exemptions
6) Location of financial and legal relationships
If residency is not clearly established, your former state could potentially continue treating you as a resident for tax purposes.
The items above are among the most common issues you may run into when moving to a different state. However, the list just scratches the surface. Taxes, estate rules, insurance coverage, and residency requirements can all impact your financial strategy in ways that may not be immediately obvious. Working with your Shakespeare advisor and tax professional can help ensure you are fully financially prepared for your move.