In June, vacant apartments in New York jumped 85% from the same time last year. This was partly due to the Coronavirus lockdown preventing apartment showings but also due to many residents moving out of the city. As the city remains shut down for the most part and work from home becomes longer-term, many are looking to escape their cramped apartments for more space and access to the outdoors.
Not surprisingly, many east coasters are snapping up vacation homes. Second-home sales in resort and rural communities in the east coast have seen a surprising surge in recent months.
Meanwhile, in San Francisco, rent for a 1-bedroom apartment dropped 11.8% year over year in June, after dropping 9% in May. In Silicon Valley, tech companies such as Twitter and Facebook are embracing work from home on a long term basis. This has caused some San Franciscans to leave the Golden State and move to nearby states where the monthly mortgage payment for a sprawling 4-5-bedroom mansion is less than the rent of a 1-bedroom San Francisco apartment.
The exodus from large cities into smaller towns and communities is contributing to a housing boom in these places, while the housing market in San Francisco and New York cools down. Fueling the housing boom is the historically low mortgage rate, with the 30-yr mortgage rate falling below 3% last week, the lowest in 50 years.
If you are moving, here are 8 key tax and legal considerations:
1. Notify your employer
Notifying your employer about your move means that they will be able to adjust any withholdings in your paycheck accordingly. This will also ensure that they correctly report your income at tax time. Even if you are staying in the same state but only moving to another city, you may still need to notify your employer as per the policies of your firm.
2. Beware of state tax differences; some have no income tax
While reasons to move can be very personal, moving to a state with low or zero income taxes has traditionally been a big lure to those in high tax states. The following 7 states have no income taxes. This means no taxes on any earned income as well as investment income such as interest and dividends. Tennessee and New Hampshire don’t tax earned income but still tax a flat rate on dividends and interest.
|States with no income tax||States with no earned income tax|
3. Moving to states with flat tax rates could save you money
If you are in a high tax bracket, moving from a state with a progressive tax rate to one with a flat tax rate could also be beneficial. A progressive tax rate structure means that your tax rate increases as your income increases. With a flat tax rate, on the other hand, your tax rate stays the same regardless of your income. Of course you still end up paying more in dollar terms as your income increases.
|States with flat tax rates||Tax rate|
4. States with low income taxes could have high property taxes
Some states that have low income taxes might charge a higher property and sales tax rate to make up for the lost revenue. For example, Texas and New Hampshire don’t tax on wages but these states have some of the highest property taxes in the country.
|States with the highest property taxes||Tax rate||Median tax bill|
5. Consider all the relevant taxes to get the full picture
Similarly, for more affluent taxpayers, gift tax and estate tax considerations are also important. For retirees, how different states tax social security distributions is important.
If you have a financial advisor, consult them to get your overall tax picture. Your financial advisor will consider the overall cost of living (e.g., housing, transportation, etc.) as well as all the relevant taxes to determine your budget and spending. Budgeting and spending correctly may help you achieve goals such as saving enough for your children’s education or saving enough to retire by a certain age.
6. You may still owe taxes in the state you’re leaving
The state you’re leaving can impose taxes on you for any income you derive from that state. For example, if you sell your property, you will owe taxes in the state you’re leaving. If you decide to rent instead, you may need to file taxes in both the states.
Similarly, if you have stock options and other equity compensation, these might also trigger taxes in the state you’re leaving.
These filings can quickly get complicated. So, if you have been doing your own taxes until this point, it may be advisable to hire a tax professional to help you.
7. Changing your tax residency can be challenging
California’s marginal state tax rate tops out at 13.3%, the highest in the country. Due to this, many high income earners have decided to leave California for nearby states such as Nevada with zero income tax rates or Colorado with a flat rate of 4.63% and beautiful outdoors.
Aware of this, high tax states like California and New York are especially stringent when it comes to changing your tax domicile. California, for example, may require you to do the following before you can officially declare yourself a non-resident.
- Sell your home in California
- Register your vehicles in the new state
- Change your driver’s license
- Change your voter registration
- File tax returns in the new state
California has also been known to do “residency audits” where you are required to not only show financial proofs of residency such as the ones above but also show how you spent money such as through credit card records. You may also need to provide detailed information about where and with whom you socialize with to prove that you have fewer ties with California and more with the new state. For these reasons, consulting with a financial advisor before moving can save you a lot of headache later.
8. Update your estate plan
Your estate plan such as your will, power of attorney and healthcare documents are written to comply with the laws of your state. So when you move, make sure to update it to comply with the laws of your new state. Consult an attorney licensed to practice in the state for this.