Moving to a New State? 3 Financial Factors You Need to Consider
The pandemic changed work patterns for many Americans. Due to the ability for many to work remotely, a new report from Upwork found that 2.4% of people, or 4.9 million Americans, have already moved because of remote work since 2020. Another 9.3% of workers, nearly 20 million Americans, are planning to move due to remote work.
The rapid rise of remote work, the surge in housing costs in certain areas, and high inflation, are some of the reasons many families are looking to move to states with lower costs of living. Before taking the leap to move to a new state, here are some factors to consider.
States with no income taxes
There are currently nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) with no income tax. Moving to a state with no income taxes may sound great, but states still need to generate revenue. Many of these states make up for it through a state sales tax, higher gas, property, or estate taxes, or a combination of these revenue sources.
In fact, 75% to 80% of Florida’s general revenue comes from the state’s 6% sales tax. The state sales tax in Tennessee is 9.55%, the highest in the nation. Gas tax is another revenue stream, with residents in Washington paying 49.4 cents per gallon on gasoline, one of the highest in the nation. Other states generate their revenue from property taxes. Property taxes in New Hampshire is 1.89%, the third highest in the country.
Moving to a state with no income tax may seem like a great idea, but you should first consider the other types of taxes you may have to pay. Estate taxes are another type of tax that differs by state. In the end, the tax savings may not be as much as you hoped it would be.
Wills, trusts, and other legal issues
Each state has its own set of laws regarding estate planning and inheritance rights, so it is important to review your documents to ensure they are within the legal guidelines. These include wills, trusts, powers of attorney, healthcare directives, and other personal documents. You may have to create a new will due to differences in state law. Some states also have a different probate process that can impact your estate planning strategies.
There are currently nine community property states in the U.S. For couples living in these states, any assets acquired during the marriage need to be split 50/50. In common law states on the other hand, both spouses do not automatically own property acquired during the marriage. Moving from a common law state to a community property state and vice versa can impact what each spouse owns.
Review your investments
Moving to a new state may require some adjustments to your investment portfolio. Each state has its own capital gains tax rates. This may impact your investment strategy, such as tax loss harvesting and ownership of municipal bonds. Municipal bonds that are tax-exempt from the original state you lived in may not be tax-exempt in your new state.
Most states tax investment income and income from work at the same rate. There are nine states -- Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin -- where long-term capital gains are taxed less than ordinary income. These states also offer tax breaks where you can exclude capital gains from your taxable income. Given the significant changes in capital gains taxes by state, you may need to review your investment holdings to minimize unnecessary taxes when moving to another state.
With remote work rising, many people are deciding to move to a state with a lower cost of living. Before deciding to move, it is important to do the necessary research on how different state laws can impact your finances. States with no income taxes may seem appealing, but to generate income, those states often impose higher sales taxes, property taxes, estate taxes, or gas taxes. You should not let state laws drive your decision to move, but it is prudent to be aware of them.