I just read through another “Best Places” list. This one was the Top 25 Tax-Friendly States to Retire, by Yahoo News. If you have too much time on your hands, you scroll though the article and envision yourself in one of these states. If your currently live in a high tax state (as I do in California, which is not on the Yahoo Top 25 list), you think, “Wow! I could drastically cut my tax bill and give myself a big raise if I moved to one of these states!” However, before you call your real estate broker to list your house and Bekins Moving to move your stuff, there are a lot of factors to consider aside from taxes when you decide where you want to live during retirement.
Should I Move?
The first consideration is whether you should move at all. If you have lived in the same house or the same community for many years and you have family nearby, to up and move away might save you some taxes but likely won’t make sense from a family or quality of life standpoint. Having deep roots is important and digging up those roots is not to be taken lightly. If you move to a new state, is it worth it to have to form a whole new social circle just to save some money on taxes? If you have family nearby, perhaps they can help you out in situations where you otherwise would have to pay out of pocket in a new community for that same help. Maybe your kids can help you paint a room or fix something broken, or even get groceries or take you to an appointment. Would you still see your grandchildren if you move a thousand miles away? All very important things.
Having lived in the Northeast while growing up, I get that cold winter weather is no fun and moving south makes sense if you are sick of shoveling snow. People have been “wintering” in the south for years, but although some people make the move permanent, others go the “snowbird” route and travel back and forth each year, seeking the best of both worlds (winter in the South, summer in the North). If you are a snowbird, where do you plant your flag as your “permanent” residence? Consider in which one you spend the most time. You may not be able just to pick the state that has the lower tax rate.
Your Current State
There are legal issues to consider. New York State, for instance, makes it very difficult for someone who is a current NYS resident to move out of state if they keep property or businesses or jobs in the state. You cannot, for instance, keep your job in New York but move to Florida and say you are working remotely and are now a Florida resident. The NYS Department of Taxation and Finance will track you down and you will have to prove to them that you are completely gone from NYS. I have read of other states (California!) starting to be more aggressive in tracking down state-tax avoiders. Check with your CPA before you make a decision.
Your Current Home
Is your current home or apartment conducive to living if you weren’t as healthy as you are now? Stairs become real obstacles as you get older and your joints creak more or you put on more weight. If you live in a split-level or a multi-story townhome now or if you live in an upper apartment that is lacking an elevator, you may need to move at some point because you can no longer manage the stairs. What about the size of your house or the maintenance needed for your yard? You may think you want to retire and devote more time to your garden, but consider if it is manageable or not as you get much older. A tip: keep it small.
You may be tired of living in a dense area, but denser areas tend to have better health care alternatives available to those who live there. Your need for quality health care will grow as you get older. Before you opt to move, make sure you are comfortable that you can go to good doctors in good facilities in your new community. You might save some money on taxes, but if you can’t get the cancer treatment (for instance), what is the point of having money on taxes?
Take Out Your Calculator
Ok, you want to avoid paying taxes, but you should at least calculate how much tax money you really will save. For instance, here in California we have Proposition 13 which restricts the amount my property taxes can be increased each year. For me to sell my house and buy another one in another state, I need to calculate how much I can pay for a house and keep my property taxes the same as they are now. The most likely case for me is that I will need to buy a less expensive house in a new state because its tax rate will be greater than my current Prop 13-advantage rate. Another issue is your income post-retirement. Don’t look at your current income while working and compare the tax rate on that vs. your tax rate on your retirement income. Instead, look at what money you plan to have coming in once retired, and calculate what taxes you would pay on that in your current state vs. your new state. Probably a CPA or a planner should help you out. You may conclude that you won’t really be saving that much and it isn’t worth it to move. Or maybe not!
Saving money on taxes or living in a new community and starting a new life once you retire has some romantic appeal but there are a lot of other things to consider when you think about moving to a lower tax state. I understand and sympathize with wanting to avoid state taxes, but you may be better off in the end if you pay a little more in taxes but are therefore able to call on family or long-standing friends to help you out in a pinch. I strongly recommend you work with your CPA or a financial planner such as me when you go to make such a big decision.