You probably know that where you choose to live has an impact on your tax bill. But did you know it could be close to 10% of your income? Three states even have state and local income tax rates in excess of 10%! Yet there are 8 states that don’t have an income tax rate.
What’s the difference between having a zero percent income tax and paying 10%? Over the course of a year, it can add up to tens of thousands or hundreds of thousands of dollars. In fact, the difference can be enough for early retirement. If you have just $200,000 in net income, that’s a $20,000 savings depending on where you live.
There are Some Challenges You May Run Into While Changing Your Residency to a State With Lower Income Taxes
Moving to a state with low income taxes is a common strategy for many people who want to reduce their overall tax burden. However, if you are not careful about how you make this move, you could run into some challenges.
Here are some tips for moving to a new state:
- Watch out for part-year income tax: Many states have rules that say if you’re in the state for even a day of the year, you must file an income tax return there and pay whatever tax is due on your income for the entire year. This can apply even if your employer withholds local taxes from your paycheck based on where you live and work. So if you move to a new state, beware of these rules and make sure you file an income tax return there.
- Do your research. The state you are moving from, after all, probably doesn’t want to lose the taxes you pay. So it may not make it easy to establish residency there. I’ve never heard of a state that didn’t have a website with information about its rules. But I have heard of states that made it so difficult to find that information that almost no one knew what the rules were.
- Remember that you will have to file taxes in your new state AND your old state. You may owe more in taxes than you thought, because the new state charges more for property tax and the old state charges an exit tax.
- Each state has different tax rules. They have different income tax rates, and some states don’t even have an income tax. Check out the Tax Foundation’s State Business Tax Climate Index to find a state that works best for you.
These are just a few reasons why it’s a good idea to work with a professional that can help you navigate a tax strategy and planning.
Consulting Services for Tax Planning in Utah County
Tax planning is the analysis of a person’s financial situation in order to maximize tax breaks and minimize tax liabilities. Moving to a new state is an opportunity to save money on taxes. And, in today’s increasingly digital world, it’s becoming easier to choose where you’ll live. As technology continues to evolve, many people are finding it possible to work remotely for companies in other cities and even other countries. This opens up the opportunity to move to a state with lower taxes.
Ultimately, there are a lot of factors to take into consideration, and if you’ve made the decision to relocate for tax purposes it may make sense to work with a local tax professional who can help you determine if it makes financial sense to relocate based on your specific situation. Give Wasatch CPA Services LLC a call at (801) 609-3119—we’d love to talk with you!