As retirees consider moving to a new state for retirement, they might consider a state where taxes are lower. But is a move to a low-tax state a wise move?
The IRS has released new data on how taxpayers are migrating throughout the U.S., and it reveals a clear pattern: Billions of dollars in income are flowing out of high-tax states and into areas where taxes, and often overall living costs, are lower.
The data, which reflects the adjusted gross income of those who filed tax returns in 2023 for the 2022 tax year, shows that California saw the highest outflows, losing $11.9 billion in adjusted gross income as residents moved away. Other states with big losses were New York ($9.9 billion), Illinois ($6 billion), Massachusetts ($4 billion) and New Jersey ($2.6 billion). Much of that lost income is tied to higher-earning households.
Where is the money going? Florida topped the list of states bagging big increases, with a gain of $20.6 billion in adjusted gross income. Other states collecting large gains in AGI were Texas ($5.5 billion), South Carolina ($4.1 billion), North Carolina ($3.9 billion) and Tennessee ($2.8 billion). Several of the states with gains, including Florida, Texas and Tennessee, have no state income tax. Others offer relatively low, flat tax rates and more-affordable housing markets.
For many households, the financial impact of moving can be significant. Going from a high-tax, high-cost state to a lower-cost region can reduce both tax liability and housing expenses — sometimes by tens of thousands of dollars per year. A household with an annual income of $250,000, for example, could save roughly $15,000 to $30,000 annually by moving from a high-tax state to one with no income tax. Meanwhile, those earning $500,000 or more might see annual savings that exceed $40,000.
Of course, taxes are only one reason Americans head elsewhere. Housing affordability, lifestyle preferences and family considerations also play a role in relocation decisions. Remote work seems to incentivize some moves, too. People who can go to lower-cost areas without changing jobs may be able to save money and improve their lifestyle at the same time.
Related: What State Has the Most Affordable Senior Living Communities?
Before you decide to move to a low-tax state
Factor in all the costs. Before you pack up and move, make sure you consider the full financial implications. If you make your home in a state with no income tax, you won’t owe state tax on wages, retirement income, Social Security benefits and capital gains. But to make up for it, some states rely more heavily on sales taxes or property taxes. For example, Texas has a maximum sales tax of 8.25%, and Florida’s is 7.5%.
As you evaluate housing costs, keep in mind that lower purchase prices don’t always translate to lower total costs. Factor in property taxes, insurance and maintenance. The benefit of paying no state income tax in Florida, for instance, may be partially offset by rising homeowners insurance premiums to protect against hurricanes.
Take stock of expenses such as vehicle registration, utilities and auto insurance, which can vary widely by state. For instance, vehicle registration in Texas can average about $50 a year, compared with more than $300 in California.
Before you count on taking advantage of lower taxes in your new state, make sure you qualify for residency. High-tax states such as New York, California and New Jersey use domicile and physical-presence tests to determine residency tax liability. Maintaining a home, voter registration or a driver’s license in a former state can trigger full-year tax responsibility there. “Snowbird” audits increasingly target part-year residents.
Kelley R. Taylor is the senior tax editor at Kiplinger.com. For more on this and similar money topics, visit Kiplinger.com.
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