Has the new year got you examining your life and wondering whether it’s time to live somewhere new?
Amanda Lott, Head of Wealth Planning Strategy, Advice Lab
Adam Ludman, Tax Advisory, Advice Lab
Erika Shaw, Family Governance Advisor
Jordan Sprechman, Practice Lead, U.S. Wealth Advisory
If you are thinking of moving, you’re not alone. Roughly 10% of Americans move every year. The average American moves approximately 12 times during his or her lifetime.
Moving usually means far more than just acclimating to, among other things, different neighbors, new work environments and altered routines. Long before you pack up your old home to head to a new one, we recommend paying close attention to the impact that changing locations might have on your family’s financial picture. Especially if you are changing locales in the United States, you’ll want to consider your new state’s taxes and the forms of ownership they recognize, their laws regarding marital and non-marital relationships, and any other potential nuances.
Consider state taxes1
Clearly a new home state’s tax system can make a big difference to you, economically. Some of our clients think of moving from a high- to a low-income tax state within the United States (e.g., New York to Florida, California to Texas). Others investigate the practicality of moving from the continental United States to Puerto Rico, a jurisdiction favored by both the U.S. government and the Commonwealth itself with low tax rates for certain U.S. citizens and for qualifying investments. Still others even entertain the idea of renouncing U.S. citizenship and moving to another country to escape U.S. taxes on most, if not all, of their future income and gains.2
It’s clear why a tax move is attractive: State income tax rates vary widely among the 50 states.3 The high for California residents of 14.4% is challenged only by the top tax rate of 14.776% paid by New York City residents with more than $25 million of income (10.9% by the state and 3.876% by the city). Meanwhile, residents of nine states (including Florida, Tennessee and Texas) pay 0% in state income taxes.4
The greater ability to work remotely has complicated many people’s calculations. There remain unresolved questions about to what extent a state can levy income taxes on a person working remotely in one state for an employer based in another state. States have recently sued one another over their residents’ taxation by another state. At present, this issue remains unresolved, with no clear precedents having developed.
Meanwhile, state transfer taxes are sometimes worth considering. At last count, 19 states have some form of estate and/or inheritance taxes. Connecticut is the only state with a gift tax.
Still, we find that most people do not in the end move for tax reasons alone—and we think that’s wise. As with investing, we always recommend clients consider tax implications, but not base their decisions solely on taxes.
If, however, you do decide there are enough reasons for you to move, we recommend you take great care on the state tax front. Your old state may continue to consider you a resident unless you can prove, by “clear and convincing evidence,” that you have not only physically departed but also established a domicile in your new state – in other words, have “left and landed.”
Proof that you have truly established domicile in a new state includes evidence of where you send your children to school, register your car, hang your Rembrandt and keep your pets. But that’s not all that’s required. So, if you’re going to move your home, do it right; ask your J.P. Morgan team for a Changing Domicile Checklist.
Look at how you own property
State laws differ in how they treat property ownership. Be careful: the specifics can have a significant impact on your finances.
Nine (9) of the 50 states, including California and Texas, are “community property” states, as is Puerto Rico, and an additional five states allow spouses to elect into a community property arrangement. In the community property states, generally speaking, all property acquired during the marriage is considered to be owned equally by both spouses, regardless of titling.5
So, pay attention if you’re married and moving from a separate property to a community property state, or vice versa. At the least, your estate-planning documents will need to be updated. At the worst, a divorce or death may result in unexpected consequences.
Also, mover beware: Not every state recognizes every form of ownership. For instance, not all states recognize “tenancy by the entirety.” Nor do all states recognize what other states might refer to as “payable on death” or “transfer on death” accounts. Moreover, states vary to some extent on, as an example, at what age a minor has full rights over assets held in a Uniform Transfers to Minors (UTMA) account.
States also offer varying degrees of protection from creditors for a homeowner’s principal residence. Florida, for example, has a “homestead exemption” that provides significant protection to the homeowner. By contrast, neither New Jersey nor Pennsylvania has homestead exemption laws.
Marital domicile matters
There is much to consider when married and moving. State law dictates how and when your estate is distributed upon divorce and death. The laws vary from state to state with respect to: the definition of marital versus non-marital property; how and when to value and divide property; and a surviving spouse’s rights to property at death. Some states are known as “equitable” distribution states; the laws of others presume an equal division of property in the event of divorce (i.e., community property states). Some states recognize that pre-marital property and inheritances are separate, by law, but treat income earned on separate property during the marriage as marital property absent an enforceable pre-nuptial agreement that states otherwise. Additionally, laws regarding a spouse’s right to an inheritance may differ depending upon where you live at the time of your spouse’s death. If no provision has been made for a surviving spouse in a decedent’s will, the surviving spouse may be entitled only to an “elective share” (usually less than half), rather than the entirety of the decedent’s estate.
Take care that upon relocation you do not inadvertently enter into a “common law marriage.” In certain states, such as Colorado, “holding yourself out “ as a married couple without ever having exchanged vows may result in certain legal rights to and claims against property belonging to both you and your common law spouse. In other words, a marriage license may not be required in order for your common law spouse to lay claim to your assets and income depending upon where you live.6
We can help—and see you there
Clearly, before you move, you’ll want to consult your tax advisors, estate-planning lawyers and J.P. Morgan team about the potential financial impact of your new state—and what you might do to adjust your financial life accordingly.
And after you move, rest assured, the Private Bank at J.P. Morgan is ready, willing and more than able to serve you and your family, wherever your new home may be.
1Or, in Puerto Rico, state and U.S. taxes.
2Watch before you leap to a new country; as such a jump could trigger an immediate capital gains tax event.
3Of course, U.S. income tax rates are uniform for all citizens and residents.
4The others are Alaska, Nevada, New Hampshire (which taxes interest and dividend income), South Dakota, Washington (which taxes long-term capital gains in excess of $250,000 per year), and Wyoming.
5The other community property states are Arizona, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin, while Alaska, Florida, Kentucky, South Dakota, and Tennessee are so-called “opt-in” or “elective” community property states.
6The common law marriage states include South Carolina, Utah, Texas (in some circumstances) and about five others.
