The coronavirus pandemic has made remote employment possible for many workers across the country — and for some, that may become a permanent arrangement. If you find yourself in a position where you're free to move, you may consider whether relocating to a cheaper, low-tax state is worth the effort.
Evidently, there are plenty of people who think it is.
"The [financial] pros are significant" to moving to a state with lower taxes, says Tasha Dickinson, a Florida-based wills, trusts, and estates lawyer with the law firm Day Pitney. "The biggest migratory pattern in our country is from New York to Florida," she says, and "another is from California to Nevada."
New York and California are two of the most expensive states in the country in which to live, in large part due to the heavy tax burdens residents must pay, which include income taxes, property taxes, and sales taxes. Florida and Nevada are two of nine states in the U.S. that don't levy income taxes as of 2020 — meaning that people who live and work in those states stand to potentially save a lot of money.
"It all stems from the fact that the individual tax implications are more advantageous," says Dickinson.
But does that mean it's worth it to make a move to a low-tax state? Excerpts say there are a lot of factors to consider.
Here are the current nine states that don't levy taxes on income:
- New Hampshire*
- South Dakota
* State does tax dividend and interest income.
To compare, California has some of the country's highest income tax rates, up to 13.3% for single individuals earning $1 million or more. So, in very simple terms, a worker with $50,000 in taxable income in Santa Barbara would fall into California's 8% income tax bracket and owe the state nearly $2,000 in income taxes, while one living in Seattle would owe the state no income tax.
Video by David Fang
Taxes add up, and it's something that even professional athletes — who are high earners, in most cases — take into account. A 2019 poll of NFL players' agents conducted by Sports Illustrated, for example, shows that football players want to play in three cities above all others: Dallas, Seattle, and Miami. All three of those cities are in states with no income taxes.
For someone earning the average NFL salary of around $2.7 million, income taxes could vacuum up a considerable portion of those earnings.
But it's important to keep in mind that income taxes are only one type of taxes that local, state, and the federal government use to earn revenues. Sales, estate, and property taxes, for example, can eat up even more of your earnings.
So, when you consider all of those taxes to calculate a total tax burden, these are the cheapest states to live in in the U.S., according to a 2020 report from WalletHub:
- Alaska (total tax burden: 5.16% of income)
- Delaware (5.5%)
- Tennessee (6.2%)
- Wyoming (6.5%)
- Florida (6.8%)
- New Hampshire (6.9%)
- Oklahoma (6.9%)
- Montana (7.2%)
- Alabama (7.6%)
- South Carolina (7.5%)
There's no easy way to determine whether or not it's worth it to move to save on taxes because every individual's situation is different. For instance, job prospects in your field may be concentrated in certain cities, so unless you can work remotely, it may be tough to find a new job in a new state. You'd also need to think about how your costs of living might change in a new state, especially big expenses like housing and child care.
The more you earn, the more you stand to benefit by moving to a lower-tax state, Dickinson says, and specifically a state with low or no income tax.
The less you earn, the less likely it is for an interstate move to be worth it. The costs of moving alone, for example, can tally up to the thousands of dollars, making it financially straining for many households. The cost of an out-of-state move generally lands somewhere between $2,200 and $6,000, according to estimates from HomeAdvisor.
You also have to think about whether it's worth it to uproot your life by moving away from your social support system and family just to save money on taxes. A quarter of people who moved for work-related reasons regret doing so, according to a survey by home-improvement job platform Porch.
Video by David Fang
Even if you avoid income taxes, states can tax you in other expensive ways. A state without an income tax may have higher sales taxes to compensate, effectively creating a regressive tax system in which taxes consume a bigger portion of lower-earners' income.
"People might be drawn to states that don't impose an income tax," says Jill Gonzalez, a public policy expert and analyst at WalletHub. "The drawback is that these states typically compensate for the lack of income tax by having high property or sales taxes. There is also a sense of 'you get what you pay for' in terms of government-provided services, which tends to incentivize higher taxes."
States also don't like it when their residents pack up and move to other states, taking their tax dollars along with them. If you were to move from New York to Florida, for example, there's a chance you could be subject to a "residency audit," where a state combs through your finances looking for connections to a state you may have moved out of — perhaps you still own property there, or have business connections — to try and claim tax liabilities.
The important thing, experts say, is to do your homework on taxes and the other financial effects of a move.
"More burdensome states typically have lower income taxes in general, but can also be worse off for [people] in lower income brackets," says Gonzalez.
This article has been updated to clarify the potential savings of moving to a state without income tax.
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