Is it Worth Moving to Another State Just to Save Taxes?

Transcript of Podcast Episode 187

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, we ask the question: is it worth moving to another state just to save taxes?

Many people have decided in the last few years, particularly as they approach retirement, to move from a high income tax state, such as New York or California, to a lower or no income tax state such as Florida or Nevada. 

Taxes are only one reason why someone might make such a move.  Weather and family connections are others.  But is it worth it from a purely financial point of view?  A recent article in Kiplinger’s Retirement Report suggests  the answer is often no.

The argument offered by author Jerry Golden is that what really counts is not necessarily the tax rate, but the amount of spendable income after taxes.

He uses New York State, where the maximum state income tax rate can go as high as 10 percent, as an example.  In spite of the high marginal rates, New York does not tax Social Security income, and offers favorable tax treatment for pension/annuity payments. Specifically, New York state allows a pension / annuity exclusion of up to $20,000 for taxpayers over the age of 59 ½.

Golden runs through a detailed example where a 70-year old taxpayer has $168,000 of total income.  In this case, because a portion of that income is excluded from state income taxes, his tax as a percentage of gross income is only 2.12 percent.

There are currently nine states with no income tax at all.  They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.  But not all are created equal.  For example, starting this year, Washington has its own capital gains tax for high income taxpayers.

Forbes magazine has also recently taken a look at this same question, but their answer is a bit more nuanced.  They point out that every state needs money for schools, roads, state payroll, etc.  It’s just that some states find the money in other places.  They cite Nevada as an example.  Nevada doesn’t have a state income tax, but they have a sales tax of 6.85 percent, making it the seventh highest in the country.  And certain cities and counties add their own local sales tax on top of that.  In Clark County, the home of Las Vegas, the average local sales tax is 1.53 percent, meaning that the combined rate is a whopping 8.38 percent. 

And there’s more.  For one thing, property taxes vary greatly from one state to the other.  As the authors suggest, “It’s important to compare all of the costs of living before you pull up stakes.”

The bottom line is that while taxes are important, it’s not easy to figure it out.  And there can be other quality of life factors—grandchildren and getting away from a cold winter come to mind—that may be more important.  But moving, even when it goes smoothly, can be an enormous hassle.  And sometimes, when you do the math, the tax savings by themselves simply aren’t enough to compensate for all the aggravation.

Does it make sense to move to a low tax state?  The decision is yours and yours alone.  But your Security Mutual life insurance advisor can help you sort through the issues that are really important to you and your family.

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