When a client wants to relocate to a state with no individual income tax, the conversation should go well beyond "save state income tax." In many cases, the tax savings are real, but domicile rules, other taxes, and practical considerations can significantly reduce—or even eliminate—the benefit.
Key considerations include:
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Establishing domicile. Simply buying a home or spending time in another state is often insufficient. Clients should generally:
- Move their primary residence.
- Update driver's license and vehicle registration.
- Register to vote.
- Change mailing address.
- Move banking relationships and professional advisors where appropriate.
- Update estate planning documents.
- Spend substantially more time in the new state than the old one.
- Maintain documentation demonstrating the move.
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Statutory residency rules. Many high-tax states can continue to tax individuals who maintain a permanent place of abode and spend enough days there (often around 183 days, though rules vary). Clients should carefully track travel days.
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State exit audits. States such as New York and California are known for scrutinizing high-income taxpayers who claim to have relocated. Maintaining contemporaneous records (travel logs, receipts, phone records, etc.) can be invaluable if residency is challenged.
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Property taxes. States without income tax may have relatively high property taxes. Compare the total tax burden rather than focusing on one tax.
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Sales and excise taxes. Higher sales taxes, fuel taxes, insurance costs, and other fees may offset some income tax savings.
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Estate and inheritance taxes. Some states impose estate or inheritance taxes even if they have no income tax. This can be especially important for high-net-worth clients.
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Business implications.
- Business income may still be taxable in states where the business operates.
- Multi-state sourcing rules continue to apply.
- Remote work can create tax obligations in multiple jurisdictions.
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Investment income. Confirm how the destination state treats capital gains, dividends, retirement income, and pass-through income. While a no-income-tax state generally does not tax these items, income sourced to other states may still be taxable there.
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Retirement planning. Consider how the move affects:
- Required minimum distributions.
- Roth conversions.
- Deferred compensation.
- Pension income.
- Timing of recognizing large capital gains or business sales.
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Healthcare and insurance. Evaluate provider networks, Medicare supplement availability, homeowners insurance, flood or hurricane risk, and overall insurance costs.
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Cost of living. Housing, utilities, insurance, and everyday expenses may outweigh state income tax savings.
Potential traps include:
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Keeping too many ties to the old state. Maintaining a large home, family connections, clubs, or substantial time in the former state can support a residency challenge.
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Assuming all taxes disappear. Income tax may be eliminated, but property, sales, business, and estate taxes may increase.
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Ignoring source-income rules. Rental income, partnership income, or wages earned in another state may still be taxable there.
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Moving shortly before a liquidity event. The timing of a business sale, stock sale, bonus, or large capital gain can determine which state taxes the income. Planning should occur well before the transaction.
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Remote work misconceptions. Employees may still owe tax where services are performed, and employers may have withholding obligations.
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Incomplete documentation. During an audit, the burden is often on the taxpayer to prove they changed domicile.
The nine states that currently have no state tax on wage income are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
For most affluent clients, the analysis should focus on total economic impact, including income taxes, property taxes, sales taxes, insurance, housing costs, estate taxes, and the strength of the domicile position. A well-planned relocation can produce substantial long-term savings, but only if the move is genuine and supported by both the facts and thorough documentation.
