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The Tax Climate Before Moving

Considering moving to another state for work or retirement? It pays to consider how state taxes will affect your income -- and your heirs.

Several states, including Florida, Nevada and Texas, don't impose state income or estate taxes -- a potentially huge advantage.

For older Americans in particular, the widely varying state and local tax laws are an increasingly important part of planning for retirement and for transferring assets to the next generation.

"The tax savings [from relocating] can be substantial when you factor in both income and estate taxes," says Sam Petrucci, vice president in the client advisory group at Credit Suisse Private Banking USA in New York.

Reasons to Care

There are a couple of reasons state taxes merit particular attention these days.

Tax differences among the states are becoming more pronounced. And, in light of federal tax-law changes made in 2001, about 18 states and Washington, D.C., have started to impose their own estate tax on top of the federal estate tax, with its top rate of 46%.

From now until 2008, the federal estate-tax exemption -- that is, the amount you can pass along tax-free -- is $2 million (although individuals can typically leave everything to a spouse tax-free). But in some states, the state exemption is much lower, meaning that people could be hit with state estate taxes even if they escape the federal levy.

Other states with no state income or estate taxes include Alaska, New Hampshire, South Dakota and Wyoming, says tax-information provider CCH in Riverwoods, Ill.

Check All the Levies

But be sure to evaluate the entire tax landscape for a particular state, including items such as property, sales and investment-related taxes. For instance, while Florida has no income or estate tax, property values there have soared, boosting residents' property-tax bills.

The Tax Foundation in Washington, D.C., has looked at the percentage of the average individual's income that goes to state and local taxes.

By its tally, the 10 states with the lowest tax burdens are: Alaska, where 6.6% of income goes to state and local taxes; New Hampshire, 7.3%; Delaware, 8.4%; Tennessee, 8.6%; Alabama, 8.8%; South Dakota, 9.2%; Texas, 9.4%; Nevada, 9.5%; Montana, 9.5%; and Virginia, 9.5%. Florida comes in 12th, at 9.7%.

The 10 jurisdictions with the heaviest burden include: Maine, ranking No. 1 with a state and local tax burden of 13.5%, followed by New York State, 12.9%; Washington, D.C., 12.8%; Ohio, 12.0%; Minnesota, 11.9%; Hawaii, 11.7%; Nebraska and Wisconsin, both 11.6%; Rhode Island, 11.5%; Connecticut, 11.3%; and Vermont 11.1%.

Meanwhile, California and New Jersey, register at 15th and 17th, respectively, with tax burdens of 10.9% and 10.8%.

Breaks for Retirees

Retirees also need to consider whether they're eligible for tax breaks on retirement income or property, which vary by state. For instance, pension income isn't taxed in Pennsylvania. And in Illinois, income from qualified retirement plans and individual retirement accounts is excluded for state income-tax purposes, according to CCH.

There are special considerations for people who own homes in more than one state.

If you want to change the state you consider your primary residence, consider seeking professional legal or tax counsel.

Some taxpayers will find that they have to take measures to extricate themselves from their old states or risk having to pay taxes there as well. To change the state of residency, "sometimes it's simply a matter of rebalancing where is the center of their activities and how much time they spend in each home," says Len Adler, a J.P. Morgan Private Bank wealth adviser based in Palm Beach, Fla. "It's often not that difficult to do if they are properly advised and careful about the details."

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