This article will ... Explain how state tax residency works and why it matters. Point out that various types of retirement income may be taxed differently depending on the state, and that state-level tax treatment may differ from federal. Note that moving to a new state may also impact property, inheritance, and estate taxes.

Retirees can have many reasons for considering a move out of state, but health, proximity to family, weather, and cost of living are typically high on the list.

For those who can plan ahead, considering the tax implications of a move could mean significant savings — or prevent costly surprises. That’s true whether you’re moving to a lower-tax state or a higher-tax one. Even an unplanned move could present tax-saving opportunities.

Moving from a high-tax state to a low-tax state

If you live in a high-tax state, you’ve probably considered how much you might save by moving.

For example, a Californian in the 9.3 percent state income tax bracket could hop the border to Nevada, which has no state income tax, or Arizona, which has a 2.5 percent flat rate.

Lower income taxes can also coincide with a lower cost of living. Married retirees who needed $140,000 a year (after tax) to get by in California might only need $110,000 in Arizona and $100,000 in Nevada.

But to get the tax benefits of living in a different state, you have to actually move there, and states tax authorities sometimes scrutinize former and part-time residents.

California, for example, says that just because you have transferred your bank accounts to Nevada and live there for three to four months a year in a home you own does not make you a nonresident of California, where you still have social ties and live for six to seven months of the year. California would retain the right to tax your income from all sources.

Establishing residency in a new state

“One potential problem associated with these moves occurs when large income events occur — for example, Roth conversions, IRA distributions, capital gain distributions — prior to establishing clear residency in the new state,” said Evan H. Farr, a certified elder law attorney at Farr Law Firm P.C., in Fairfax, Virginia.

For starters, many states require that you live there slightly over half the year — 183 days, to be specific — to qualify as a tax resident.

Becoming a resident also means obtaining a new driver’s license (or state ID), registering vehicles, and registering to vote.

Delays in updating official records may create audit or double taxation risk, Farr pointed out, especially when retaining real estate in the previous state.

“Generally, if you sell your home and move to another state where you’ll have new doctors, church, voting registration, and similar, you have established a new domicile, or home, for tax purposes,” said Annette Nellen, professor and director of the Master of Science in Taxation Program at San Jose State University in California.

Moving important possessions and getting involved with community or social organizations in your new state can help prove residency in the event of a state tax audit. So can keeping records of which state you’re in on which dates.

To learn the guidelines for establishing tax residency in another state — or avoiding tax residency in your previous state — try your state’s tax website. Nonresident tax return questions and nonresident audit guidelines are a good starting point.

If you have substantial assets, complex income (such as deferred compensation), or are expecting a large income event, consider meeting with an attorney specializing in residency tax planning.

Moving from a low-tax state to a high-tax state

Despite charging zero income tax and having warm weather and a low cost of living, Texas and Florida were two of the top six states with the highest percentage of people moving out specifically for retirement in 2024, according to an analysis of U.S. Census data by Hire a Helper, an independent online moving services marketplace. While the survey doesn’t say what state these retirees moved to, it’s reasonable to assume that at least some of them are no longer living free of income tax.

Consider, hypothetically, a retired couple in their 70s who could move from Texas to California to live near their oldest child. Going from no income tax to a 9.3 percent marginal rate would be a significant consideration in their planning. Not only would $100,000 in after-tax income be reduced to $92,700, but they might need to spend $1 million in their new state to buy a home like the $250,000 one they occupy in Texas.

Moving to a new state may also have estate planning implications because some states impose estate or inheritance taxes with different thresholds and rules than federal ones. These taxes might have a meaningful impact on how much your heirs receive. It depends on the state, the tax rate, and their relationship to you.

How do states tax retirement income?

Taxation of retirement income varies by state and by type of income, and it doesn’t always match federal tax law.

Several states don’t tax any income:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Wyoming
Washington¹

Some states that otherwise do charge income tax don’t tax certain types of retirement income, such as public employee pensions, and only a few states tax Social Security. For example, Illinois doesn’t tax Social Security benefits, pension payments, or pretax retirement account distributions.

Some states don’t take a portion of your distributions from pretax retirement accounts like 401(k)s. For example, if you’re 65 or older and live in Georgia, you may not have to pay tax on up to $65,000 in retirement income.

If you’ll be selling investments that aren’t in retirement accounts to help fund your retirement, keep in mind that, unlike the IRS, many states don’t offer a tax break on long-term capital gains or qualified dividends.

Farr, who practices elder law in Virginia, Maryland, and the District of Columbia, said his clients “are typically unaware of the cumulative impact of state and local income taxes, property taxes, and personal property taxes.”

If you own the home you live in — your primary residence — then it’s considered a personal asset for tax purposes. This means that if you make money when you sell it, you may owe tax on your profit, but if you lose money when you sell it, you don’t get to deduct your loss.

Tax planning, then, should be an important consideration if you plan to sell your home when you move (even if you’re not moving out of state).

“Be sure you meet the favorable federal tax rule to exclude up to $250,000 of the gain — $500,000 if married filing jointly — by being sure that you have owned and used the home as a principal residence for at least two of the five years preceding the sale,” Nellen said.

IRS rules may reduce this time if you’re moving due to employment, a health condition, or an unforeseen circumstance like a natural disaster or the death of a spouse. See IRS Publication 523 for a summary.

Property tax changes when moving in retirement

It’s also important to research how property taxes compare in your current and prospective states.

“You won't want to be surprised by, for example, higher property taxes than you had in the state you're moving from,” Nellen said. “Also, you may have had a special, lower property tax bill in your current state — such as because you owned the home for many years — that you won't have in the new state with a new home.”

Further, some of the income tax savings you might enjoy by moving to a lower-tax state may be absorbed by higher taxes on home ownership. Property taxes, which are typically levied at the county level, are relatively high in parts of New Hampshire and Texas — both as a percentage of income and in absolute dollars, according to the Tax Foundation.

Taxes might be part of the picture if you retire out of state, but they probably shouldn’t drive your decision.

Not everyone who moves in retirement likes where they end up, and changing your mind can be pricey. Other factors can outweigh tax differences: cost and availability of health care, proximity to friends and family, and climate-related expenses (like electric bills and home insurance).

“However, when individuals have a choice regarding their retirement residence location, or after the decision to move has been made, it can be very helpful to understand tax and residency planning considerations sufficiently in advance so as to avoid unnecessary taxes and costly errors,” Farr said.

Even if you think you can work through all these variables on your own or with your tax advisor, getting an outside opinion on the big picture could save you time and money, help you plan around issues you might have overlooked, and bring greater confidence and clarity to your decisions.

Reach out if you’d like to talk with a MassMutual financial professional about your move — or any other aspect of your retirement.

Discover more from MassMutual…

Retirees: A checklist for relocating to a new state

Tax considerations for retiring abroad

Retiring abroad? Your plan and checklist

_________________

Home

Tax considerations for retiring out of state