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For many retirees, the idea of moving to a state with no income tax seems like a straightforward way to increase savings. But what appears on the surface to be a simple tax decision becomes more complex when other costs, time and lifestyle factors come into play.
GOBankingRates spoke to financial experts to find out whether the costs and savings of relocating make it worth moving to a no-tax state.
Why isn’t moving to a no-tax state an immediate savings?
At first glance, eliminating state income taxes seems like a great way to save. But Julian B. Morris, a CFP and Principal concierge wealth managementexplained that this is just one piece of a larger tax puzzle.
“Most people focus on the state income tax and don’t pay attention to how much the rest of their plan interacts with the move, where the income is coming from, how they will draw and what they will actually spend,” Morris warned.
And, according to CFP and Chairman Stewart Koesten, if a retiree is still having income from a business or company in the state you moved from. Aspire Wealth PartnersThey are “more likely to continue to pay income taxes on that income in that state” because the income is “taxed at the source.”
These states may add other taxes
Koesten pointed out that states like Florida, Texas, Nevada, Tennessee, South Dakota and New Hampshire are often called tax-friendly, but they still generate revenue through taxes.
“You could be charged a higher sales tax, higher property tax or license fee to make up for the income tax. States with no tax still produce income to meet their revenue needs,” he said.
How other costs can offset the savings
Even if income taxes go down, other costs can rise rapidly, sometimes wiping out the expected savings. For example, Koesten pointed to car insurance, gas, groceries, eating out and other expenses that may be higher in a big city than a small one.
If total spending is high, retirees may not feel much relief from lower taxes.
Health care access could outweigh tax savings
There are other costs besides taxes to consider with the move, Morris said. Health care premiums and access become more significant over time and can vary widely by location. He noted that “quality, access and continuity of care” may also change.
And while coverage may shift, Koesten said established relationships with physicians won’t be there and finding new relationships could be “difficult and time-consuming.”
Many retirees don’t plan for hidden relocation costs
Relocating itself comes with expenses that are not always obvious, Morris said, including “relocation costs, lifestyle changes and even the need to travel more frequently … which are not always visible in a simple comparison.”
The more you plan ahead, the less necessary it will be to choose a no-tax state.
When holding on might be a better financial move
In some cases, not moving at all may yield better financial and personal outcomes.
“There is a real value in rebuilding your financial situation within a personal framework, especially in later life and retirement,” Morris said.
Koesten agreed that taxes should not be the only consideration. Ultimately, the decision must come down to balancing quality of life with cost.
How to know if you’ll really get ahead or not
A non-income tax state can create opportunity but only if it fits into a broader, carefully coordinated plan.
The only way to know whether a move will actually save money is to look at the whole picture, not just tax rates, Morris said.
“Retirees can plan and estimate whether they will actually come out ahead financially by looking at disposable income after everything including taxes, home insurance, health care lifestyle costs,” he said.
Koesten suggested using comparison tools and professional guidance to model scenarios before taking any action.