Retiree’s State of Residency Tax Issues

When a person retires, he or she may decide to move to another state for a variety of reasons, such as living in a warmer climate, being closer to children or other relatives, avoiding state income tax, health reasons, or a combination thereof.

If the retiree’s move is intended to be permanent, it is important that legal domicile be established in the new state. If domicile is not established, the retiree may be subject to income tax as a resident of both the old and new states. In addition, since each state has its own rules relating to residence and domicile, both states may try to impose taxes on the retiree even if he or she has established domicile in the new state, but has not adequately relinquished domicile in the previous state.

Furthermore, if the retiree dies without establishing domicile, both the old and the new states may claim jurisdiction over the retiree’s estate.

The more time that elapses after the move and the more steps the retiree takes to establish domicile in the new state, the more difficult it will be for the old state to assert that the retiree resides or has domicile there.

The following steps tend to establish domicile in a new state:

• Register to vote in the new location.

• File a change of address form with the post office at the old location and change the address on documents, such as tax returns, wills, contracts, insurance policies, passports, and living trust agreements.

• Obtain a driver’s license and register automobiles in the new location.

• Open and use bank accounts in the new location.

• Move items from safe deposit boxes in the old location to the new location.

• Purchase or lease a residence in the new state and sell the residence in the old state.

• If an income tax return is required, file a resident return in the new state and a nonresident return (or no return, if appropriate) in the old state.

• File for property tax relief under a homestead exemption (if any) in the new state.

• Move all items that make a house a home, such as mementos, heirlooms, sentimental items, trophies, collections, furniture, etc., to the new state.

For many purposes, the location of property is determined by reference to state law, and may be somewhere other than where the property is physically located. The state in which the property is deemed to be located may assess income taxes (if any) on income or gains relating to the property. The state may also assess death and succession taxes, and that state will be where probate proceedings will occur when the individual dies. Furthermore, rules of that state will be used to determine whether testamentary instruments are valid and whether the terms of the instruments (such as the powers of a trustee) are legally enforceable.

The retiree’s state of domicile generally determines the rules relating to the ownership and tax treatment of intangible personal property. Thus, if the retiree established domicile in a new state, that state’s laws generally will apply to his or her intangible assets, such as bank accounts, stocks, bonds, notes, partnership interests, trust income rights, and insurance contracts. Interest income from a savings account, for example, will normally be taxed by the state of domicile, rather than the state in which the account is located.