Low-tax states attract budget-conscious Americans
WASHINGTON (Reuters) - Bob VanSickle was a lifelong New Jersey resident, but when he left after 52 years for what he calls "kinder, gentler" New Hampshire, he never looked back.
It wasn't the warm fuzzies that won him over; it was the lower taxes on income, property and purchases.
"This is great," he said, seven years later. "I'm still paying less now than I was when I left New Jersey."
VanSickle estimates that he and his wife Anna save as much as $15,000 annually on taxes alone because they live in New Hampshire. "That's a year's tuition for my kid -- a lot of disposable income," he said.
"After I tell my old friends in New Jersey, they are all planning on moving out of the state," he said.
Of course, changing your life just to save on taxes is extreme. But it could happen more and more in the future, as some states aim to fix their budgets with dramatic tax increases, as Illinois did earlier this month.
Many of the states with large population gains in the 2010 Census are well-known low-tax havens, such as Florida, Texas and Nevada.
The tax-motivated move is a common strategy for retirees who abandon high-tax states for low- and no- tax places. Retirees who can stash money into a tax-deferred retirement account during their working years, and then withdraw the money to spend on their new life in a low-tax state, can especially profit.
BIG INCOMES, BIG NUMBERS
"There can be pretty big dollars involved," said Lisa Osofsky, a CPA and financial adviser who helps clients from New Jersey, New York and Connecticut figure out their pre- and post- move finances. "A wealthy individual who could be earning several million dollars could save $50,000 or $100,000" by living in a lower-tax state, she said.
A family of four with $150,000 in income would save $13,368 in state and local income taxes if they traded in New York for Florida, according to calculations prepared by Bob Meighan of TurboTax. That doesn't even count additional savings in property taxes, estate taxes, or the cost of winter coats and boots. (Though some of those savings would be shaved when the state taxes were deducted from their federal taxable income.)
A couple with $85,000 in retirement income and Social Security benefits could squeeze out an extra $112 a month in income tax savings if they moved from California to Michigan, Meighan said. And get a lower cost of living, too.
Sometimes, even in-state moves from one town or county to another can result in sizable savings for homeowners who can face very different property tax levels. Furthermore, wealthy clients will sometimes move to position themselves for more favorable estate tax.
Anyone considering an inter-state move should consider their before and after tax picture, said financial adviser Mark Berg of Timothy Financial Counsel in Wheaton, Illinois. Some organizations post comprehensive state tax information on their web sites so consumers can guesstimate their situation. (Two prominent ones are on the websites of Retirement Living here, and the Tax Foundatihere)
Those pre-move calculations can help in the reverse direction, too. Berg was recently able to help a client maximize his tax benefits before an intra-state move. The client was leaving Illinois, a state that does not tax pension distributions, for Montana, which would have added a 7 percent tax to money coming out of the client's individual retirement account. Berg helped the client convert his account to an after-tax Roth IRA before he packed up his bags and headed to Big Sky Country.
PROVING WHERE YOU LIVE
Those high-tax states do not like to lose high-income emigrants, and will check to make sure that former residents really have moved and are not simply pretending that their winter home is their permanent domicile.
"New York is the most aggressive, probably followed by California," said Bob Meighan of TurboTax. "New York has a long reach and will go after retirees, in particular."
David Moise, a colleague of Osofsky's at WeiserMazar, said that there are two forces at work there. "More people are leaving because of the disparity in income and estate taxes, and New York is becoming much more aggressive about examining those people because there's much more of a need for revenue," he said.
"The state will come in and ask for 'clear and convincing evidence' that a person who keeps his New York ties has really moved to Florida, or elsewhere," he said. At WeiserMazar, clients have had to produce phone bills, credit card statements, apartment measurements and EZ pass receipts to prove that they no longer spend most of their time in New York.
"These audits can sometimes be intrusive," said Brad Maione, a spokesman for the New York State Department of Taxation and Finance. But, he said, his agency was working to make them as efficient as possible. "The Department strives to strike the right balance between collecting the right amount of tax and minimizing impact on taxpayers," he said.
New York uses the percentage of time spent in the state as one measure of where a person really lives. It just changed its tax forms for 2010, so that residents now have to enter the number of days they spent in New York City on their forms. And any part of a day, even a lunch, counts as a day spent in New York.
That, of course, is only an issue for people who live in two homes. Someone who spends fall in New York, winter in Florida, and summers in Europe would have trouble proving his official domicile.
But that's not a problem for the VanSickles of the world. The occasional family visit back to see relatives in New Jersey is just fine with him. And with the money he has saved on taxes, he can afford a nice hotel room.
(Reporting by Linda Stern; Editing by Greg McCune)