State Tax Implications of Moving States

Determining State Tax Residency

Your state tax residency determines which state has the right to tax your income. Unlike federal taxes, state residency rules vary.

• Domicile vs. Statutory Residency:
  • Domicile: Generally defined as your true, fixed, permanent home – the place you intend to return to whenever you are away. You can only have one domicile at a time. Changing domicile requires not only moving but also demonstrating intent to make the new state your permanent home (e.g., registering to vote, getting a driver's license, opening bank accounts, etc.).
  • Statutory Residency: Most states also consider you a resident for tax purposes if you maintain a permanent place of abode in the state AND spend more than a certain number of days there (commonly 183 days, or about six months) during the tax year, even if your domicile is elsewhere.
• Importance of Establishing Residency: Clearly establishing residency in your new state (and severing ties with the old one) is vital, especially if moving from a high-tax state to a low-tax or no-income-tax state, to avoid being taxed by both states on the same income.
• Keep Records: Maintain records documenting your move date and actions taken to establish residency in the new state (lease/deed, utility bills, driver's license, voter registration, etc.).

Filing Status in the Year of the Move

In the year you move between states with income taxes, you likely won't be a full-year resident of either state. Your filing status will typically be:

• Part-Year Resident: Most common scenario. You file a part-year resident return in both your old state and your new state.
• How it Works:
  • On each state's part-year return, you generally report income earned specifically while you were a resident of that state.
  • Income earned from sources within a state while you were a non-resident (e.g., rental income from property in the old state after you moved) may also need to be reported on that state's return.
  • Rules for allocating income, deductions, and credits vary by state. State tax forms and instructions provide guidance.
• Nonresident Filing: If you continue to earn income from sources in your old state after becoming a resident of the new state (e.g., rental income, business income), you may need to file a nonresident return in the old state in subsequent years as well.
• Credit for Taxes Paid to Another State: To avoid double taxation, states often provide a tax credit for income taxes paid to another state on income that is taxed by both. Check the rules for both states.

Key Tax Differences Between States

• Income Tax:
  • Rates & Brackets: States have varying tax rates (flat or progressive brackets) and income thresholds. Eight states have no broad-based individual income tax.
  • Taxation of Retirement Income: States differ significantly in how they tax Social Security benefits, pensions, and withdrawals from retirement accounts (401k, IRA).
  • Deductions & Credits: Availability and amounts of deductions (e.g., standard vs. itemized) and tax credits vary widely.
• Sales Tax:
  • State Rate: Varies significantly. Five states have no statewide sales tax.
  • Local Taxes: Many cities and counties add local sales taxes, increasing the overall rate.
  • Taxable Goods/Services: States differ on what items are taxed (e.g., groceries, clothing, services).
  • Use Tax: If you buy items online or out-of-state without paying sales tax and bring them into a state with a sales tax, you technically owe "use tax" (equivalent to sales tax) to your new state, often reported on the state income tax return.
• Property Tax:
  • Set locally (county/city/school district) based on property assessments and local budget needs. Rates can vary dramatically even within the same state.
  • Research typical property tax rates in the specific areas you are considering.
  • Check for homeowner tax relief programs (e.g., homestead exemptions) in the new state.
• Other Taxes: Consider potential differences in vehicle registration fees/taxes, gas taxes, estate or inheritance taxes (only imposed by a minority of states), etc.

Tax Planning Tips for Moving

• Update Employer Withholding: Immediately provide your employer with a new Form W-4 and any required state withholding forms for your new state to ensure correct taxes are withheld from your paychecks.
• Keep Good Records: Maintain documentation of your move date, income earned before/after the move, and expenses related to the move (while federal moving expense deductions are mostly eliminated for individuals, some states may still allow them).
• Understand Remote Work Implications: If you work remotely, be aware of potential tax obligations in both the state where your employer is located and the state where you reside. Some states have reciprocal agreements to simplify this, but not all.
• Consult a Professional: Especially for complex situations (e.g., business ownership, significant investments, moving mid-year), consulting a tax professional experienced in multi-state taxation is highly recommended.