This Couple Discovered a Simple Way to Save Tens of Thousands of Dollars a Year When They Retire
Clark Hurst first discovered Clear Creek Tahoe, a golf community near Lake Tahoe, a few years ago when a friend invited him and his wife Ellen to play the course for a day.
The Southern Californian parlayed that into a temporary membership at the new Nevada golf community. And then early last year, he and his wife bought a lot where they eventually plan to build a home across the street from the course. “Because of the elevation and the backdrop, the ball gets a lot of hang time,” says Hurst, 58. "It’s really dramatic."
The same can be said for the potential tax savings the couple can enjoy by relocating to Nevada after they retire.
For Hurst, the allure of retiring to this golf community goes beyond its stunning 18-hole golf course, easy access to skiing and hiking, or its more than 850 acres of permanently protected open space. While retirement is still a ways off for the couple, Hurst figures that moving from a high-tax state (California) to a no-tax state (Nevada) could save them tens of thousands of dollars a year just in taxes.
He should know. He's a certified public accountant.
The Case For Moving To a Low-Tax State In Retirement
Sometimes the road to retirement means following the road less traveled, even if that takes you across state lines.
The idea of moving from California, where the top state income tax rate is 13.3%, to Nevada — where there is no state income tax — was appealing even before the passage of the Tax Cuts and Jobs Act late last year.
That legislation is best known for having slashed personal income tax rates and boosted the standard deduction to $24,000 for married couples filing jointly.
But thanks to the law, taxpayers now can deduct no more than $10,000 of their combined state and local income taxes, property taxes, and sales taxes. That means there’s even more incentive for residents of high-tax states to think about crossing state lines in retirement.
To understand how the math works, consider this example of a retiree with just under $1 million in retirement income.
Staying in California would cost this person more than $108,000 a year in state income taxes based on the 12.3% rate (the additional 1 percentage point to get to 13.3% kicks in after $1 million).
Under the old tax rules, that same person could deduct the full amount of state income taxes paid on their federal returns, reducing their total tax burden by about $50,000. Under the new rules, most of that break goes away.
Most taxpayers are only beginning to grapple with how the new tax laws will ultimately impact them, both on the positive and the negative, says Paul Jacobs, a certified financial planner and enrolled agent with Palisades Hudson Financial Group in Atlanta.
Other Factors to Consider In Addition to Taxes
While the new tax law might offer an additional nudge for retirees or soon-to-be retirees thinking about relocating, it’s only part of the equation. “There can be several good financial reasons for leaving a high-tax state, but we view it as a last resort for reducing taxes,” says Jacobs.
Seven states don’t levy individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, Tennessee only taxes interest and investment income, but it's in the process of phasing that out. And New Hampshire limits personal income tax to interest and dividend income.
Perhaps not by coincidence, six of these states — Florida, Nevada, South Dakota, Texas, Washington, and Tennessee — routinely show up in lists of the most popular states for retirees who are relocating, according to recent surveys.
In some cases, the out-of-state move needn’t be drastic.
For example, a retired couple living in Portland, Oregon, where the top tax rate is 9.9%, could save thousands of dollars a year by relocating to Washington, just on the other side of the Columbia River.
Minnesotans can escape high-single-digit rates by heading west to South Dakota. And Georgians can pocket savings by moving south to Florida.
Pay Close Attention to Each State's Tax Rules
That said, retirees should pay attention to how each state taxes retirement income, as well as figure for their own sources of income. Roughly a dozen states have income tax but offer a break on retirement income, including pensions, Social Security, and IRA distributions.
There are other caveats to keep in mind, including the total cost of living in each location – everything from housing costs and homeowner insurance to travel expenses for visiting friends and family.
Meanwhile, you’ll want to make sure you abide by individual state tax rules related to cutting ties and establishing new ones. “Some states are pretty aggressive when it comes to people claiming they are no longer a resident but still spending a lot of time in that state,” says Jacobs, noting that every state has its own guidelines related to domicile.
Besides the usual flags, such as whether you change your driver’s license, states may look at how much time you spend and where you keep your most valuable or sentimental possessions. If you are spending a lot of time in your old stomping grounds, says Jacobs, track your time.
Yes, relocating could offer some tax savings, but at the end of the day, the move should make sense for you personally. You didn’t spend your working years saving only to spend your golden years in a place that doesn’t appeal to you.
That's not a concern for the Hursts, who know the Tahoe area well.
The main reason to buy the property "was the golf and the lifestyle," Clark says. "But if we can save on taxes down the road, that's icing on the cake."
Correction: An earlier version of this story incorrectly stated how much a hypothetical retiree with nearly $1 million in annual income would pay in California taxes. Based on a state income tax rate of 12.3%, that person would save more than $108,000.