Sometimes it pays to shop around when deciding which state you want to live in during retirement — particularly when it comes to how hefty the tax bill will be.
That was the case for one couple who decided to sell their Fort Lauderdale home and relocate to the Atlanta area, recalled Thomas W. Balcom, founder at 1650 Wealth Management.
The move to a similar-sized house reduced the couple's property tax bill from $20,000 per year to about $5,000, due to the fact that they did not have to pay taxes for schools in Georgia. In addition, the first $130,000 of the couple's retirement income from pensions or investments was exempt from taxes in their new state, as well as their Social Security income.
Florida is a popular retirement destination in part because it has no tax on individual income. Other states with no individual income tax include Alaska, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee charge income taxes only on dividends and interest.
This map from Kiplinger shows which states are considered most and least friendly when it comes to taxes. (Click to enlarge.)
Yet experts warn there are other things retirees should consider aside from income taxes when determining how much they may owe in a new state.
Watch other fees
"Lots of times the type of income they expect to rely on during their retirement years can be a bigger factor," said Rocky Mengle, senior state tax analyst at Wolters Kluwer.
Retirees who rely on Social Security benefits or pensions should check whether their new state taxes that income. Thirteen states currently tax Social Security income, according to Wolters Kluwer. Most states have some kind of tax on pension income, though it varies from state to state.
Retirees who plan to rely on income from rental properties or investments should also check to see what the tax rates on that will be, Mengle said.
Retirees who are buying a new home will want to evaluate property tax rates in that state. If a retiree plans to buy a boat, furnish a home and make a lot of other purchases, they should take sales tax rates into consideration. Individuals also want to take into account how a state treats estate taxes, Mengle said.
Retirees should look at all state and local rules, said Peter J. Creedon, CEO at Crystal Brook Advisors. That means watching for higher taxes or fees on everything from registering cars and boats to taxes or surcharges on resorts.
"Many states have all these little fees," Creedon said. "They've got to make their money some way."
Make a clean break
All those who move to a new state will want to make sure they firmly establish residency so that they don't get hit with taxes from the state they leave behind.
For individuals who move to Florida, there is a form to file with the state to make it your domicile, according to Chris Raulston, wealth strategist at Raymond James. But for most situations, the distinction is not as clear.
"There's no form you file, box you check," Raulston said. "It comes down to facts and circumstances."
To establish residency in the new state, individuals should avoid spending more than half the year ― 183 days ― in their former state, according to Raulston.
Ideally, individuals should purchase a home in their new state and sell a former home. Those who want to hold on to the property in their old state may consider transferring it to other family members, a trust or a limited liability company.
"They don't necessarily have to sell it," Raulston said. "But they do have to relinquish ownership."
Retirees or individuals who move also want to make sure they gather as much documentation as possible to prove they have changed residency. That includes applying for a homestead exemption (if one is available) in the new state, getting a new driver's license, changing the address listed on mail and bank accounts and changing locations of religious observation and medical services.
"The best advice I could give is the individual or couple should make sure they have a good CPA or attorney," Raulston said.
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