If you’re considering retiring or have a job that gives you the flexibility to live anywhere, relocating to a tax-friendly state could offer significant financial benefits. States with lower or no state income taxes can make a considerable difference in your long-term financial situation. Here’s a closer look at how moving to such states can be advantageous and what steps are required to establish your new domicile.

Why Relocate to a Tax-Friendly State?

One of the main reasons people move to certain states is the potential for tax savings. For instance, many individuals from high-tax areas in the Northeast have relocated to Florida. Florida is known for its tax-friendly environment, offering no personal income, estate, or inheritance taxes. Additionally, the state limits property tax increases by capping annual assessment hikes at 3% of the previous year’s value or the Consumer Price Index (CPI), whichever is lower. Property owners can also benefit from a homestead exemption, which may reduce taxable property values by up to $50,000.

When compared to states with high income taxes—such as Washington, D.C., where the top rate can reach 10.75%—moving to Florida or similar states can lead to significant long-term savings, not only on income taxes but also on rising property taxes.

States Without a State Income Tax

Several states offer no state income tax, which can be particularly beneficial for retirees. These states include:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Wyoming

It’s important to note that Washington state has an income tax on investment income and capital gains for certain high earners. For those living in a no-income-tax state, Social Security benefits, IRA and 401(k) withdrawals, and pension payments are also typically exempt from state income tax.

How to Establish a Domicile for Tax Benefits

To enjoy the tax advantages of your new state, you must first establish it as your legal domicile. A domicile is your permanent residence, and it is more than just declaring your new state as your home—it requires intent and documentation.

In simple terms, your domicile is the state where you plan to make your permanent home. If you own multiple homes, you must prove to the tax authorities that your primary residence is in the state you’ve chosen. This is especially important for estate and inheritance tax purposes, as two states could potentially claim you as a resident.

If you’re not careful about how you manage your residency, trying to change your domicile could end up being more costly than not attempting to relocate at all.

Steps to Establish Your New Domicile

To establish your new domicile in the state you’ve chosen, here are several key actions to take. While there’s no single checklist for proving domicile, the combination of the following steps can demonstrate your intent:

• Spend at least 183 days per year in your new state: This roughly equates to more than half the year, but your activities in other states could jeopardize your claim of intent. For example, spending significant time at a second home in another state could indicate that the other state is still your primary residence.
• File the necessary tax returns: You may need to file a nonresident tax return in your old state or submit a final return when you leave.
• Change your address: Make sure your bank accounts, insurance policies, credit cards, and bills are linked to your new state address. Update your will to reflect your new domicile as well.
• Redirect your mail: All your mail, including subscriptions and bills, should be sent to your new address. If you’re not in your new state, have your mail forwarded rather than changing your address temporarily.
• Keep track of your time spent in each state: If you plan to spend considerable time in more than one state, it’s helpful to maintain a diary or log to document your location on each day.
• Apply for state-specific benefits: If your new state offers benefits, like Florida’s homestead exemption for property taxes, be sure to apply for them.

These are just a few steps to take when changing your domicile. The general rule is to align all aspects of your life with your intent to establish a new permanent home in your chosen state and to maintain thorough documentation to support your claim.

Final Thoughts

Moving to a tax-friendly state can provide significant financial advantages, especially if you’re retiring or have the flexibility to work remotely. States without state income taxes or with favorable property tax laws can help you keep more of your income. However, it’s essential to establish your new domicile legally by following the proper steps and maintaining thorough documentation. With careful planning, relocating to a tax-friendly state can be a great way to maximize your savings and reduce your tax burden over the long term.