The 2020 Texas Relocation Report reported that 86,164 Californians moved to Texas. According to NerdWallet’s Cost of Living Calculator, housing costs are 75% lower in Houston versus San Francisco. Food costs are 30% lower; transportation costs are 31% lower and so on.
If you’re considering moving to a different state, taxes in the new state may be the deciding factor—especially if you expect them to be lower.
Consider All Applicable State and Local Taxes
If your objective is to move to a lower-tax state, it may seem like a no-brainer to move to one that has no personal income tax. But that’s not a no-brainer!
Taxes also play a role in a decision to move. California’s property taxes along with other parcel taxes are about 1% while similar tax rates in Texas are nearly 1.9%, in the top 10 property tax rates in the country. However, when applied to the median price of a home ($706,900), Californians pay $7096 compared to the tax paid on the median priced home in Texas ($215,658) of $4098. Even though property tax rates in Texas are higher, the price of housing is more than lower to make up the difference.
Payroll taxes play a role, too. “California has one of the highest state unemployment tax rates with minimum unemployment insurance tax rate from 1.5% vs. Texas at 0.45%. California also imposes employment training tax with current ETT rate at 0.1 %, State disability insurance tax (SDI) at 0.9%. Texas has no ETT and no SDI tax at all.” (source: virtualcpaforyou.com)
You must consider all the taxes that can potentially apply to local residents—including property taxes and death taxes.
Defang the State Tax Domicile Issue
If you decide to make a permanent move to a lower-tax state, it’s important to establish legal domicile there in order to decouple yourself from taxes in the state you came from.
The exact definition of “legal domicile” varies from state to state.
In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.
Because each state has its own rules regarding your domicile, you could wind up in the worst-case scenario—with two states claiming that you owe state taxes because you established domicile in the new state but did not successfully terminate domicile in the old state.
Finally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that state death taxes are owed. Not good!