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Does Your Retirement Plan Include Moving to a Lower Tax State?

Does Your Retirement Plan Include Moving to a Lower Tax State?
Tax and estate planners say they’ve seen an increase in residency audits in recent years.

Does your retirement plan include moving to a lower tax state? People have long moved from high-tax to low-tax states, however, this movement increased during the pandemic and continues today. Beck, Lenox and Stolzer Estate Planning and Elder Law firm has been noticing an aggressive trend in the response from some high-tax states, especially in cases where people maintain a home in two states and try to pay taxes only in the less costly state. A recent Forbes article issues a clear warning: “Beware The Tax Traps Spring On Those Who Move In Retirement.”

These states levy a tax on income, estate and sales taxes based on where people make their legal domicile. However, determining where you live isn’t quite as cut-and-dried as people think. Tax departments in high-tax states have amped up their residency audits. When the system sees someone who once filed an income tax return as a full-time resident begins filing as a part-time resident or doesn’t file, the state wants to ensure that it’s not missing out on any revenue.

A residency audit is conducted. It may consist of a questionnaire asking about where the person lives, asking them to provide information about their lifestyle and providing details about the property they own in both states.

An aggressive state will search property records and other public records for evidence of ongoing connections to the state. Social media has become part of this information gathering, no matter how private people may set their profiles.

If you’ve moved for retirement or enjoy the benefits of living in two or more states, you’ll need to choose a state and prove your legally established residence in that state. Ideally, you’ll do this long before the residency audit arrives.

Did you already receive a letter from a state tax authority asking questions? Chances are the state has already begun investigating your status. The letter might include a questionnaire, an interview request, or both.

If you haven’t yet moved, consider how you’ll respond to these questions:

  • Where do you vote?
  • Where are your cars, boats, or other vehicles registered?
  • Do you belong to a house of worship, and if so, where is it located?
  • Do you have an estate plan, and what address does it show?
  • Where do you own property, and how much time do you spend at each location?
  • Do you belong to any social clubs – country clubs, bowling leagues, gyms, or community groups?
  • If you own a business or are an employee, where is your business or employer located?

You’ll need to demonstrate where you live and whether you’ve truly cut ties with your prior state of residence. A final word of advice: don’t go into a residency audit unprepared or unrepresented. The possibility of paying taxes in two states should motivate you to make any necessary changes.

Another detail to consider when moving to retirement is that an estate plan made in one state may not be valid in another state. A local estate planning attorney in your new domicile should be consulted to review your will, power of attorney, healthcare directives and other state-specific documents to ensure they will be effective in your retirement home. Beck, Lenox & Stolzer practices estate planning in the states of Missouri and Illinois. For assistance in those states, schedule a free consultation by clicking here.

Reference: Forbes (April 23, 2024) “Beware The Tax Traps Spring On Those Who Move In Retirement”

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