The ability to work remote is an amazing thing. As I write this, my team leader is working temporarily in Arizona, my teammate is working from Washington, and I am currently residing in California. Even hundreds of miles apart, we can work seamlessly without a hiccup. This newly found freedom is becoming common and has opened opportunities for relocation to different cities and states without having to change the company one works for. Regardless of the motivation for your relocation, it is important to understand all your options and how they might affect your financial plan. Here are three common pitfalls:
Paying Income Tax in Multiple States
I’ve watched people move away from California for the sole purpose of getting out of state income tax only to find out that they are still subject to California state income tax AND subject to other taxing jurisdiction as well. Accidentally being subject to state income tax can take a huge toll on your cash flow.
So, how do you know where you will be paying taxes if you move?
Generally, there are two factors:
- Where do you reside?
- All income is typically subject to taxation in your state of domicile. State of domicile is determined differently for each state – If you are snow birding, I recommend looking up the specifics of the states you are considering.
- Where does your income derive from?
- All income is typically subject to taxation to the state in which it is sourced based on three employer factors: Payroll, Property and Sales Revenue.
- Investment income is sourced to your state of domicile.
When income is subject to taxation by multiple states, there generally will be a credit towards your state of domicile for the taxes paid to another state.
For the lucky residents of Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming – you may not even know that state taxes exist; because in your states, they don’t. However, if your income is sourced from another state, that income will be subject to that state’s taxation.
Different States have Different Estate Tax Requirements
Nearing retirement or retired, this factor becomes much more relevant. Different states have different estate taxes ranging from 0% to 20%. Washington and Hawaii have the highest estate tax rate brackets at 20%. The tax rate, however, does not show the whole picture. The exemption amount also needs to be considered.
How do estate taxes work?
When someone passes away, the net value of their estate in excess of their exemption is subject to taxation by both the federal government and the state of domicile.
The current exemption for federal taxes is $22.36M (Married Filing Jointly). Not many people are subject to this because their estate value does not exceed this amount. The exemption for many states is much lower and, therefore, estate tax at the state level is much more common. Washington, for example, currently has a $2.193M exclusion. This means the net value of one’s estate exceeding $2.193M will be subject to taxation. Currently, 38 states do not have an estate tax.
If multi-generational capital preservation is one of your goals, estate tax implications need to be carefully considered.
Changes to Your Roth vs. Traditional Calculations are Overlooked
The age-old argument of Traditional vs. Roth is one that can go on for days. The reason being everyone’s situation is different and needs to be looked at independently. Whenever the outcome seems to be a coin flip, our advisors typically will push for the Roth – greater flexibility in retirement and the fact that taxes tend to go up.
Key variables in a Traditional vs. Roth calculation include your current tax rate and an assumed tax rate in retirement. If you are a high-income earner and live in a high-tax state, the benefits of the traditional will be much higher than if you were in a lower tax bracket or a low-tax state.
When moving between states it is a good idea to revisit your Traditional vs. Roth calculations and make sure you are using these tools to achieve your goals most efficiently.
Moving out of state can be very exciting and, in many cases, very financially beneficial. With decisions like these, it is best practice to ‘measure twice, cut once.’ If you are considering a move out of state, we would love to have a conversation to ensure everything is being considered.
Cody Beaumont, CPA
Wealth Planner
