Dreaming of a No-Tax State: What to Consider so You Can Avoid Losing Sleep

When you reside in a state that has a relatively high tax on individual income—California and New York easily come to mind—it’s natural to imagine what it would be like to live in a state where no such burden exists. There are in fact nine states to daydream about: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. These states don’t just eschew income taxation; some of their constitutions expressly outlaw it.

The no-tax nine are anything but shy when it comes to touting their ostensible advantage: they compete vigorously for retirees and empty-nesters to relocate, and they implore businesses to either start up or move their headquarters within state borders. Texas—and especially its capital, Austin—has been wildly successful in luring companies (among them Oracle, Hewlett Packard Enterprise, Tesla, Caterpillar) from high-tax states by promising low taxation and little regulation. And people go where the jobs go. More than 100,000 Californians—many of them young, college educated, and ready to put down roots—made the move to the Lone Star State in 2022, according to U.S. Census data.

A misleading moniker

Some taxation refugees are finding, however, that the “no tax” moniker can be misleading. Each of the no-tax nine has infrastructure, schools, and essential services that must be funded somehow—if not through taxation of earnings, then through other vehicles. Dig deeper and you’ll find that Nevada and Washington have some of the highest levels of sales/excise tax in the country (5.56% and 5.66%, respectively). Texans pay a beefy 4% property tax annually based on their home’s value (Californians pay 2.79%). And New Hampshire collects tax on dividends and interest (but will phase it out in 2025).

In general, every state has its methods for collecting tax money to fund the greater good. Some are just a bit less obvious about it.

An out-of-state relocation involves a host of considerations that range from the practical to the financial to the emotional, and it’s impossible to ponder all of them in a brief article. But if taxation is your primary motivator, some data needs to be weighed carefully before you hire the movers.

• Think about overall tax burden (not just individual income tax). As mentioned, there are myriad ways for a state government to squeeze money out of residents without taxing their earned income. A WalletHub table called “Overall Tax Burden by State” uses data from the Tax Policy Center to come up with the total tax burden (as a share of personal income) for each of the 50 states. Overall burden is the total of tax burdens for property, individual income, and sales/excise, and the table ranks all states in each category as well as in sum. This is a very helpful tool for not only seeing the big picture but also for weighing the importance of a particular tax burden to your own situation. Say, for example, you’ve been intrigued with Nevada because it ranks #32 overall (New York is #1, of course). You might be unpleasantly surprised by the Silver State’s high sales/excise tax, especially if you’re retired and trying to stretch your modest savings while enjoying the recreational offerings of Vegas and Reno. Likewise, the relatively high property tax in Texas may not be so daunting if you’re young and intend to rent a warehouse loft in downtown Austin with a couple of friends, rather than buy a single-family home for the family you don’t have yet.
• Less income tax doesn’t always mean real value. Try to not focus myopically on state tax rates (income, property, sales/excise) without also considering what you’ll get—or not get—in return. Some of the most alluring no-tax states rank well below other states in affordability and spending for education, healthcare, and infrastructure. For example, a family with school-age children may have more disposable income in Florida (#46 in overall tax burden), but the state’s lower level of education spending per capita could result in the parents shelling out for tutors, college prep courses, or private school. Likewise, a California retiree who has a chronic health condition and wants to live their golden years in next-door Nevada should be aware that it ranked near bottom in healthcare spending per capita in 2020, according to a Kaiser Family Foundation study.
• Retirement income could become a ripe target. In the eyes of tax authorities, earned income is one thing and investment income is another. Tennessee collected tax on dividends and interest until just a few years ago, and New Hampshire has begun phasing out its similar tax. But Washington state continues to tax the investment income and capital gains of certain high earners. The laws for state budget vary in at least 50 different ways, so it’s not unreasonable to imagine that a state could look at retirement income for fiscal relief during a prolonged slump, especially when the state constitution requires a balanced budget.

The 183-day rule

Many people relocate to a tax-advantaged state and consider it only a part-time commitment. For whatever reason— proximity to loved ones, investment in real estate, soft launch to retirement, variety is the spice of life—they intend to keep their original domicile but reside in the new state to enjoy its tax benefits during filing season. The precise rules may differ, but generally you must live in a state for half the year plus a day (183 days) to qualify as a statutory resident. You also need to be able to prove it. Residency audits are real, and they go well beyond checking your electric bill. Checklists abound online—here are some of the most useful recommendations from experts in taxation and “redomiciling”:

☑️  Buy or lease property in the new state. If you’re renting, the lease should be for at least a year.

☑️  Keep a record of the amount of time you spend in the new state and elsewhere, including the old state.

☑️  Change your driver’s license and vehicle registration to the new state.

☑️  Register to vote in the new state, and contact the registrar in the old state to have your name removed from the rolls.

☑️  File a declaration of domicile in the new state.

☑️  Move bank accounts and safe deposit boxes to the new state.

☑️  Declare a change of address, from the old state to the new state.

☑️  Establish the new state as your home base. Large purchases and return flights are two methods.

☑️  Change legal documents to reflect residency in the new state. This includes wills, trusts, passports, insurance policies, and federal tax returns.

☑️  Develop local affiliations. Clubs, churches, and charities are good places to start.

☑️  Apply for a homestead exemption, if it exists in the new state. Florida has one, and it counts against your property tax.

The words domicile and residence are not interchangeable; they have specific meaning in the tax code. (A domicile is a person’s permanent home, and a residence is where they spend at least 183 days a year.) These nuances can be confusing, especially because each state has its own statutes for proving one or the other. To avoid the pitfall of dual residency—for which you could owe tax in two different states—consult with a tax professional about the strategies that best fit your goals and tax situation. The team at Mercer Advisors includes specialists in taxation who can help guide you through an out-of-state relocation, whether it’s permanent, part-time, or still only a daydream. Contact us now to get started.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

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