Home sweet home? How state residency changes the game when it comes to income tax

September 15, 2017

By Josh Miller, CPA
Tax Manager

Is it time to consider changing where you hang your hat? In light of the recent Illinois tax hike, people are again asking if it makes sense to leave local tax burdens behind and move to a more financially friendly state. While money might not be the only factor in this decision, it should be a major consideration. After all, you can visit your old home many times with the money saved on state income tax alone.

While the benefits of a residency change grow proportionately with your income level, there are significant advantages to consider for those living on a moderate income as well. Here are a few simplified examples of individuals who would have realized major benefits from making a move in the 2016 tax year:

Example 1: Married couple, age 64, retired with the only income being $75,000 per year of pension and IRA payments with no itemized deductions. Living in Iowa, they would have paid approximately $2,900 in state income tax. Moving over to Illinois, where no retirement income is taxed, they would have paid zero income tax.

Example 2: Married couple, age 50, earning $250,000 of qualified dividend income. Living in the Western Dubuque school district, they would have paid approximately $19,000 of state and local income tax to Iowa. Living in Illinois, they would have paid approximately $9,200 of state and local income tax. Living in Texas, Florida, or any other of various states which don’t tax the income of individuals, they would have paid zero state and local income tax.

Example 3: Married couple, age 30, self-employed as technology consultants performing services for clients via the internet earning a combined $150,000 per year. Living in Dubuque, they would have paid approximately $10,000 of state and local income tax. Living in Illinois, they would have paid approximately $5,100 in state and local income tax. Living in Texas, Florida, or any other of various states which don’t tax the income of individuals, they likely would have paid zero state and local income tax.

These examples highlight the disparity and opportunities that exist because of the greatly varying state income tax laws. In the case of Illinois, these tax figures will increase by as much as 32% in 2017. Many people are not in the position to uproot their lives to take advantage of these opportunities, and there are many other financial aspects to factor such as property taxes, home prices and quality of life before deciding whether a move to another state is right for you. If you are in position where you are retired, living primarily on investment income, or perform services primarily over the internet, you would be remiss not to discuss with your tax advisor the financial opportunity an interstate move might provide.

Once it is decided that a move to another state is in your best interest and feasible, there are many actions to take, especially if you plan to maintain a home in your current state. Some of these actions are obvious, such as spending the majority of the year in the new state. While some of these actions are not as obvious, such as changing the address to which your investment statements are sent, obtaining resident hunting and fishing licenses in the new state, and claiming the new state for any homestead credit for real estate taxes. The tax planning team at Honkamp Krueger has dealt specifically with many individuals who have changed residencies and defended such residency changes with various state tax authorities.

If you’re wondering if a residency change is right for you, contact 888.556.0123 or submit our online form.

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