Clients Moving to Low-Tax States? Document Carefully to Avoid Tax Disputes | Lord Abbett

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Practice Management

There are many benefits to living in a low-tax state, but it’s not as easy as just packing boxes. Help clients make a move wisely and meticulously.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

Living in a low-tax state can bring savings that add up to a small fortune over time—and clients living in high-tax states may want to consider a move to low-tax havens such as Florida or Texas. Advisors should help their clients choose a state that makes sense, and prepare to document every step of the move.

Before a move takes place, however, consider both one-time and recurring costs. Help your clients evaluate their income potential and the cost of living in their new state by using estimates specific to their lifestyle. This will require looking beyond general cost-of-living metrics.

If your client is moving for work, you may be able to deduct some moving expenses on her federal tax return. Unless the move occurred at the very beginning or end of the year, it's necessary to track how many days your client lived in each space. This will help determine how to handle nonresident or part-year resident returns for the year of the move.

Choosing a State—Look Beyond Income Taxes
For clients hoping to move, choosing where is half the battle. The roster of tax-friendly states invariably includes the seven states that do not levy general personal income taxes. Three are warm (Florida, Nevada, and Texas), and four are a tad cooler (Alaska, South Dakota, Washington, and Wyoming).

Thirty-five states and the District of Columbia have a graduated income tax, while eight states have a flat tax. Many states do not tax Social Security benefits, and some don’t tax pension income or retirement-plan distributions. New Hampshire and Tennessee tax only dividend and interest income. Cities, counties, or municipalities in 14 states have their own income taxes.

While estimating your client's income taxes in a new state isn't too difficult, it's only a start. Comprehensive analysis must also include sales and property taxes. Sales tax rates vary, as well as what’s subject to the tax. Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not impose statewide sales taxes, though some do permit local sales taxes.

It’s harder to compare property taxes among states. Each government calculates them differently. However, New Jersey and Illinois imposed the highest effective average property tax, according to the Tax Foundation. Hawaii and Alabama had the lowest.

Fourteen states and Washington, D.C., impose estate taxes, and six states have inheritance taxes. Maryland and New Jersey have both. Measuring inheritance, estate, and gift taxes can be as important as evaluating the different income tax rates for wealthier clients.

Wyoming is the lowest-tax option for a single taxpayer earning $50,000 in taxable annual income, according to recent calculations by Forbes. Alaska, South Dakota, Texas, and Louisiana rounded out the top five. These states are among the lowest for wealthier individuals as well.

While choosing a tax-friendly state for your clients will depend on specific circumstances, New York and California are particularly unfriendly across all income brackets.

Document, Document, Document
To protect their revenue sources, states with high income-tax rates may take extreme measures to keep affluent residents from moving away. High-tax states like New York and California have aggressively pursued residents who departed for more tax-friendly climates—sometimes levying an exit tax.

Making a clean, swift, and well-documented move is the best way to avoid tax disputes. If your clients live in a high-tax state, help them document their move carefully to help build a strong case that supports their new residency. Encourage clients to save any moving receipts and housing documents and to transfer driver's licenses and voter registration. As soon as the move is complete, have your client update his/her mailing address on all financial accounts and bills right away.

State tax authorities should be made aware of the move as soon as possible. Clients should renounce any homestead exemption they claimed in their old state and claim it in the new state if possible.

Your client should be working toward creating a picture that shows that the move is a permanent lifestyle change rather than trying to take advantage of a tax loophole. Moving with family, pets, and valuables can help illustrate this, as well as establishing ties to gyms, churches, or professional organizations in the new state.

Some clients will be unable to sever ties with their former state for family or professional reasons. These realities can result in a more complicated move. If your client intends to spend significant time in their old state, encourage him/her to keep a careful travel log with receipts and confirmation of where he/she traveled and when. Most states have a threshold for determining residency status, often 183 days or more spent in a state per year. Clients will need to pay close attention to those thresholds in order to avoid tax disputes.

—by Benjamin Sullivan

Benjamin Sullivan, EA, is a certified financial planner and portfolio manager with Palisades Hudson Financial Group (, headquartered in Scarsdale, New York. He recently moved to Texas, with plans to open his firm’s Austin office.



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