The Financial Landscape of Relocating

Since 2020, 4.9 million Americans, or 2.4% of the population, have moved because of remote work. This trend began during the pandemic and is ongoing. The duration of remote work is uncertain. This uncertainty has prompted many individuals to consider relocating and exploring new living arrangements.

The reason is simple. Why pay high costs, both in money and personal health, to live in expensive areas? Being close to work is no longer needed. Many people are choosing to live in places that are more affordable.

Some are also seeking better weather. Others are looking to be closer or farther from their family. This is why people are moving to different locations.

However, before embarking on the journey to a new state, we think it's essential to weigh these four key factors.

State Taxes

Currently, nine states—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—impose no income tax. New Hampshire taxes only interest and dividend income, while Washington taxes capital gains for certain high-income earners.

Moving to a state with no income taxes can be appealing. This is especially true for people leaving high-tax states like California.

California has the highest top tax rate in the country at 13.3%. It's important to know that all states need money to provide services like fixing roads, education, and building infrastructure. States without income taxes find other ways to get the money they need.

For instance, Florida predominantly relies on its 6% sales tax, which contributes 75% to 80% of its general revenue. Tennessee boasts the highest sales tax rate in the nation at 9.55%. Gasoline taxes bring in a lot of money for the government. In Washington, the tax on gasoline is 49.4 cents per gallon, one of the highest in the country.

Additionally, states derive income from property taxes, personal property taxes (e.g., on vehicles or watercraft), and other local levies. New Hampshire's property tax rate stands at 1.89%, ranking as the third-highest in the nation. Estate tax policies also vary from state to state.

State and local taxes can impact your savings when moving to a place with no or low income taxes. Your actual savings may differ from your initial expectations. Your savings might not be exactly what you expected.

Wills, Trusts and other legal issues

Each state has its own estate laws, so you may need to make changes to your estate plan to comply. Some states have a more complex probate process, which can affect how you manage your estate. For tailored tax guidance, it's advisable to consult with tax professionals.

Another financial aspect to consider is asset division in the event of divorce. Currently, nine U.S. states operate under community property laws, wherein assets acquired during marriage are evenly divided upon dissolution. In contrast, common law states do not automatically grant joint ownership of assets acquired during marriage to both spouses. Transitioning between common law and community property states can directly influence asset ownership.

Given the divergence in estate planning and inheritance regulations across states, it's crucial to review your legal documents to ensure compliance with local laws.

Investment Portfolio

Your investment portfolio may require adjustments due to variations in capital gains tax rates across states. These differences can influence your investment strategy, such as decisions regarding gains or losses harvesting for tax optimization. Additionally, the tax status of certain holdings, like municipal bonds, may be affected. Bonds that were tax-free in your old state may not be tax-free in your new state.

Furthermore, many states tax investment income and earned income at identical rates. Nine states have lower tax rates on long-term capital gains than on ordinary income. These states are Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin. Some of these states even offer tax incentives allowing you to exclude capital gains from your taxable income.

Given the significant disparities in state capital gains taxes, it's prudent to reassess your investment portfolio to mitigate unnecessary tax burdens when relocating. Seeking guidance from a tax or financial advisor can aid in reviewing and adjusting your portfolio accordingly.

Education

Contrary to retirement and brokerage accounts, 529 savings plans are typically administered by individual states. When contemplating whether to fund a 529 plan in your new state or maintain your existing one, several factors come into play. For instance, some states offer tax deductions for contributions. However, before committing to a new plan solely for tax benefits, it's essential to scrutinize factors such as investment options, management experience, historical performance, fees, and other investment considerations to ascertain whether the plan in your new state offers superior advantages.

Additionally, consider the cost of higher education. Are state schools a probable choice for your child? If so, weigh the difference between in-state and out-of-state tuition rates in the state you're relocating to. If education serves as the primary motivation for your move, changing residency to capitalize on in-state tuition rates might be a worthwhile consideration.

Bottom Line

Certainly, the flexibility to work remotely from any location is liberating. If you're contemplating a move in pursuit of happiness, that's commendable. Before making a decision, research how different state laws could impact your finances.

Basically, don't just focus on states without income taxes. Make sure to understand the overall tax system and think about how it could affect your estate or your child's education. While state laws shouldn't dictate your choice of where to settle, it's wise to understand their current and future impact.

Sources:
https://foolwealth.com/insights/moving-states-what-does-it-mean-for-your-finances

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.