Tax Tips for Switching ZIP Codes

In a previous post, we touched on the nuances of changing your domicile. Now, let’s take a deeper dive into tax advantages and financial considerations.

1. Estate & inheritance tax. The IRS exempts taxes on estates valued at $12.06 million or less at the time of passing for individuals (a married couple has a combined exemption of $24.12 million). The state level is a different matter—the excluded amount can be far lower depending on the state. Eleven states levy the so-called death tax and five states impose what is called an inheritance tax. Maryland is the only state that carries both. If avoiding all estate and inheritance taxes is your objective, switching domiciles to a tax-advantaged state will boost your cause.
2. Income tax. Eight states have no income tax, while 41 tax wage and salary income. (New Hampshire taxes just dividendsA cash payment to investors who own stock in the company. and interest income.) Before relocating, it pays to cast a critical eye on the state’s tax code. But keep in mind: Some states with low or no income tax make up for it with higher property or sales tax. Be sure to research every facet of a state’s tax picture before moving. Better yet, consult a professional.
3. Cost of living. Your dollar could be worth more or less depending on where you live. If you’re considering a move (or working remotely in a different state), check out this handy calculator on NerdWallet to see how far your dollar will go. Housing costs are the biggest variable, with transportation, food and entertainment also registering an impact.
4. Remote work. The pandemic has created a situation where many people find themselves working remotely for a company headquartered in another state. In other words, your ZIP code has changed, but your work situation hasn’t. What does this mean for your taxes? Broadly speaking, you will owe income tax in the state you claim residency. However, states are aware of the revenue they are losing in the age of remote work. It’s become commonplace for the state you live in to grant a “credit” for the state where your company is based. Things can get tricky if you receive a 1099 from a company with state taxes that are higher than the state where you live. Our takeaway: Work with your employer to be sure the appropriate state withholding is taken from your paycheck and talk with your tax preparer to understand how remote work will affect your finances.

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