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Taxes & Relocating in Retirement: What to Think About Now

June 14, 2019

YOU COULD CALL IT an unintended consequence of the 2017 tax law: People in high-tax states may have one more incentive to relocate in retirement.

The law capped allowable state and local tax deductions, including property tax, at $10,000 (for individuals and married couples, filing jointly). “As a result, people who live in states with high taxes, such as New Jersey, New York or California, may no longer be able to deduct all of their state taxes paid on their federal return,” says Vinay Navani, CPA and shareholder at WilkinGuttenplan. Because of that, some are finding that they owe more in federal income tax.

 

“If you live in a high-tax state and are considering relocating in retirement, it could make financial sense to move to one that would reduce your tax liability,” Navani adds. Taxes are one of the many financial considerations you’ll want to weigh as you plan ahead to cover your expenses in retirement.

 

 

Several of the states without an individual income tax compensate by implementing higher state sales or other taxes. Those hidden costs could have a real impact on your budget.

A lot of people looking to reduce their month-to-month retirement expenses gravitate toward states without an individual income tax. Currently, seven states belong in that category (see map, above). New Hampshire and Tennessee don’t tax personal wages, but they do tax some investment income.

 

Of course, there are plenty of other reasons for people nearing retirement to explore relocating, says Bill Hunter, director, Personal Retirement Strategy and Solutions, at Bank of America. “You may want to move closer to family, or live in a warmer climate, for instance. But the financial implications of your choice should play a large role as you begin to plan your retirement budget.”

 

Before you start scanning the real estate listings for Fairbanks or Fort Worth, here are a couple of other tax-related factors you might want to think about.

 

Your cost of living could be higher in a low-tax state. “You can’t look at relocating in a tax vacuum,” notes Navani. Look at the overall prices in the area where you’re considering relocating: everything from utilities to groceries to health-care costs.

 

Low-tax states can make up for lost revenue in other ways that could impact your budget. Several of the states without an individual income tax compensate by implementing higher state sales or other taxes, including taxes on necessities such as gasoline, or charging more for state services such as driver’s licenses or car registrations. Those hidden costs could have a real impact on your budget.

 

“One way to get a clearer idea of the tax implications of relocating is to ask your tax professional to run a projection of what your tax picture might look like in the new location,” Navani suggests.  

 

In addition to consulting a tax expert, be sure to consult with your financial advisor for help in managing the costs of relocating, as well as your bigger financial picture, Hunter adds. “Speaking with an advisor can help give you a sense of how your expenses and income could shape your lifestyle if you decide to move.”

 

Explore “Unlocking the Value of Your Home” for insights on how the value of your current home fits into your financial strategy.

Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice.  You should consult your legal and/or tax advisor before making any financial decisions.

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