State Tax Impact When Moving to a New State

With the work-from-home policy becoming popular, more and more people move from one state to other states. Some move and settle with a new state; however, others just move temporarily to other states and move back after COVID-19. Moving permanently to a new state has a different state tax impact from temporary move to other states.

Just recall income tax-free states are:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Texas
• Washington
• Wyoming

If the taxpayer just temporarily moves to different state for remote work and intends to go back to the resident state, he/she can check out my post
Where Do You Pay Tax if You Reside in One State and Work from Other States?

Establish domicile to avoid double taxes.

The first thing to move permanently to a new state is to establish domicile if the taxpayer wants to escape from state having a higher state tax. Each state has a different definition of domicile. In general, domicile is the taxpayer’s permanent location. In addition, domicile is the place where the taxpayer plans to return after a period of residing elsewhere.

Once the domicile location is settled, the domiciled state becomes the resident state; taxpayers can start paying the lower state tax. However, during the period of transitioning from one state to another state, both old and new states may claim the taxpayer state tax. Therefore, establishing the domicile to the new state is an important task.  The more evidence showing a taxpayer establishes domicile to the new state, the better chance for shortening the transition period. During transition period, the taxpayer may pay double taxes despite of some credits back from one to another state tax.

Ways to establish the domicile to the new state

• Buy or lease a home in the new state
• Sell the home in the old state. If the taxpayer doesn’t want to sell the home, be sure to rent it out at market rates to an unrelated party.
• Get a driver’s license and register vehicles in the new state. Register to vote in the new state.
• Enroll kids to the new state school system.
• Change mailing address with the U.S. Postal Service to the new state
• Change address on passports, insurance policies, will or living trust documents, and other important documents.
• Open and use bank accounts in the new state and close bank accounts in the old state. If the taxpayer doesn’t want to close bank accounts in the old state, he/she also needs to change the address to the new state.

When a taxpayer successfully establishes the new resident state, all taxpayer’s income is taxable by the resident state.

For example: If a taxpayer moves from California to Texas and keeps California bank accounts. Texas is now the taxpayer’s resident state. Because Texas has no income state tax, the taxpayer doesn’t have to pay Texas income tax on the interest and dividend income from California banks. California also doesn’t tax the taxpayer on the interest and dividend income from California banks for the same period.

Considerations

Business income

For business income a taxpayer receives in the old state, the taxpayer may face higher state tax impact. Both states may tax on the same income; so the taxpayer may need to apply for a credit on the new state’s tax return. For example, if the taxpayer receives interest on the accounts receivable in his/her business which operates in California, and he/she now is a permanent resident of North Carolina, the taxpayer may pay tax on the interest on the business accounts receivable to California and apply for a credit on the North Carolina tax.

Tax-exempt state investments from the old state

Tax-exempt state investments in one state may be taxable in another state.  Therefore, a taxpayer should review his/her investment portfolio as a part of the move preparation to avoid a big state tax impact when filling the tax return.  For example, holding tax-exempt California municipal bonds and being a California resident, the taxpayer won’t pay tax on that income including dividend, capital gains, etc.  However, if he/she owns the same California bonds and is Indiana’s permanent resident, he/she must pay Indiana income tax on the income

Retirement income

Most states that collect income tax will also tax your retirement income.  If a taxpayer is receiving retirement income but moves to a new state, the new state can tax the retirement income, but the old state can’t.

Restricted Stock Units (RSUs)

Majority states tax on the income to the extend the taxpayer performed services in the state.  Worst case, both resident and non-resident states may tax on the same income.  Fortunately, to avoid double taxation from state tax impact, the taxpayer will get credits back from one state.

Example 1

If a taxpayer receives an RSU grant in California. The RSU grant is vested when he/she is Washington resident. 

The income attributable to the difference between the fair market value of the stock on the vesting date and the price the taxpayer paid for the stock has a source in California where the taxpayer performed the services.  RSUs are free stock from the corporation; therefore, California will tax the whole amount of market price of the RSUs on the vesting date if 100% taxpayer service performed in California. 

On the other hand, if the taxpayer still works for the same company which grants the RSU and 50% of the service performed in California, the tax paid may be allocated between California and Washington (no income tax for Washington) This amount will show up on the taxpayer W2.  The taxpayer subsequently sold the RSUs, any difference between the market price of the RSUs on the vesting date and the market price on the selling date will become Washington capital gains (no income tax for Washington).

Example 2

Since Washington has no income tax, the taxpayer won’t get into a situation of being taxed twice.  However, for example if it’s Massachusetts rather than Washington, Massachusetts may also tax on the same income that California already taxed because the taxpayer is Massachusetts resident when the RSU is vested.  This causes the double taxation situation; Fortunately, one state will allow a credit against its taxes paid to the other state on this double-taxed income.

Before moving to a new state and start a new life, the taxpayer should find out the state tax laws from the current state and the new state as a part of preparation for the move. Understand the state tax laws can greatly help to minimize the state tax impact especially stocks which are parts of corporation’s benefits.