Each year, approximately 10% of the U.S. population changes homes, and while 85% of these movers stay within their current state, around 15% venture to a new one, according to the U.S. Census Bureau. If you're among those considering a cross-state move, it's essential to understand the financial implications—particularly how your exposure to state taxes might change.
How Will My Exposure to State Taxes Change When I Move?
When moving to a new state, it's crucial to evaluate how this move will impact your state tax obligations. Here are a few key considerations:
Cutting Ties with Your Old State: To avoid being subject to income and/or estate taxes in your old state, especially if your new state has lower or no taxes, you'll want to take steps to establish your residency in the new state. This often involves cutting ties with your previous state to ensure you're no longer considered a resident there.
State Taxation Rules: Generally, a state can tax all the income of its residents, but it can only tax the income of nonresidents to the extent that it is derived from that state. This means that if you are no longer a resident of your old state, your old state should only be able to tax the income you earn there, if any.
Residency Status: Most states use a two-pronged test to determine residency status:
- Domicile: If your principal home (domicile) is in a state, you are considered a resident of that state.
- Statutory Resident: Even if your domicile is not in a state, you could still be considered a resident if you fail the statutory residency test. This test typically includes criteria like the amount of time you spend in the state.
What Determines Where My Domicile Is?
Your domicile is your principal home—the place you intend to return to even if you're living elsewhere temporarily. While you may be a resident of multiple states, you can only have one domicile at any given time. To ensure you're no longer subject to taxes in your old state after moving, you'll need to take steps to remove yourself as both a domiciliary and a statutory resident.
Here are some general guidelines:
- Domicile: As mentioned, your domicile is where your heart is. It's the place you consider home.
- Statutory Residency: You might be considered a statutory resident of a state if you fail the residency test outlined by state law. A common test includes:
- Owning/Renting a Residence: Having a home in the state.
- Time Spent: Spending more than 183 days or six months in the state during the tax year.
To remove yourself from the tax jurisdiction of your old state after your move, you'll need to ensure that you no longer meet these criteria.
Next Steps
If you're considering a move, it's a good idea to consult with tax and legal advisors who are knowledgeable about the laws and regulations of both your old and new states. They can help you navigate the complexities of state taxes and ensure that you're making the best decisions for your financial future.
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