How Moving Can Impact Your Finances
Preparing to move is generally not a pleasant task. We tend to accumulate a lot of stuff and, unfortunately, we don’t recognize it until we start packing it in boxes. However, after we move and settle in, the excitement begins to build with all the new opportunities that are available in a new place.
Depending on where you move, if you don’t do your research prior to moving this excitement may come with unexpected expenses. They could be small like an excise tax on gasoline or large like an increase in property tax. No matter where you move, to some degree, your finances will be impacted. Here are some things to consider so your financial plan can be prepared for your move.
The Importance of Establishing Domicile
When your move takes you to another state, one of your first trips is most likely to the DMV to update your license and register your vehicle. This tedious step helps you establish your new domicile which has important tax implications.
Things to consider: There’s a difference between domicile and residence. A domicile is your permanent home and residence is where you reside for a time (e.g. a second home).
For example, let’s say you’re moving out of New York and looking to establish domicile elsewhere. For one thing, that trip to the DMV may not be enough to establish domicile; New York state will look at numerous lifestyle factors to determine your domicile. Depending on how New York views your domicile, you might pay taxes in New York and the state you move to.
Reviewing and Updating Estate Documents
As previously mentioned, updating your legal documents carries more importance than simply changing the address. It’s important to note that wills, trusts, medical directives and powers of attorney will likely be valid in your new state, be sure to update these documents shortly after moving. Also, there might be differences in the state laws surrounding these documents that can could cause some headaches.
Your new home state could impact your assets as well as your wealth and estate plans. There are two different methods that determine asset ownership in a marriage in the U.S., common law property and community property. A community property state assumes any assets accumulated during a marriage automatically belong to both spouses. On the other hand, in a common law state assets accumulated belong to one spouse until the other spouse’s name is added to the asset. After you move consult with your wealth manager and estate planning attorney to determine whether you need to change the registration of any assets.
Things to consider: When separate property and community property are mixed the assets become commingled. Commingled assets are then considered community property.
It’s impossible to stress how important taxes are to relocating. Be sure to familiarize yourself with the income, property, sales and estate/inheritance tax rates of the state you are relocating to. Most of these taxes are unavoidable and should be considered part of your new cost of living expenses.
However, there may be ways to save on other taxes states can impose–for example, capital gains taxes. Most states tax capital gains at your marginal state income rate. If your new state of domicile has preferential capital gain rates, then you can delay recognizing gains until you are filing solely in your new state.
Things to consider: While you can no longer deduct moving expense on your federal tax return, there are seven states that still allow you to deduct moving expense or exclude moving reimbursements from your income.
At TCI we often say, “don’t let the tax tail wag the investment dog.” This sentiment also holds true for moving. While you can’t avoid the financial impact of your new state, we’re here to help you plan the taxes you will pay strategically. Our comprehensive approach to financial planning enables us to understand and apply the ever-changing financial landscape to your unique situation. Happy moving!