Welcomes What to Know About State Taxes Before You Relocate
What to Know About State Taxes Before You Relocate
State taxes can add or subtract tens of thousands of dollars from your annual budget, making them one of the most financially impactful variables in any relocation decision. A household earning $150,000 pays roughly $13,000 in state income tax in California. That same household pays zero in Texas. Over a decade, the difference exceeds $130,000.
The State Income Tax Landscape
Nine states levy no personal income tax: Alaska, Florida, Nevada, New Hampshire (dividends and interest only through 2024, fully phased out 2025), South Dakota, Tennessee, Texas, Washington, and Wyoming.
Among states that do tax income, rates and structures vary enormously. Flat-tax states like Illinois (4.95%), Colorado (4.4%), and Michigan (4.25%) apply the same rate regardless of income. Progressive-tax states like California (top rate 13.3%), New York (top rate 10.9%), and New Jersey (top rate 10.75%) take increasingly larger percentages as income rises.
| State | Top Marginal Rate | Structure | Notable Feature |
|---|---|---|---|
| California | 13.3% | Progressive | Highest top rate in US |
| New York | 10.9% | Progressive | NYC adds 3.88% local tax |
| New Jersey | 10.75% | Progressive | High property taxes compound impact |
| Texas | 0% | None | Higher property and sales taxes offset |
| Florida | 0% | None | No estate tax either |
| Tennessee | 0% | None | Phased out investment income tax |
| Washington | 0% | None | High sales tax (6.5% + local) |
| Illinois | 4.95% | Flat | All retirement income exempt |
Beyond Income Tax
Property taxes vary as dramatically as income taxes and affect homeowners directly. New Jersey effective rate: 2.23% of home value annually. Hawaii: 0.28%. On a $400,000 home, that difference is $7,800 per year.
Sales taxes affect daily spending. Combined state and local rates range from zero (Alaska, Delaware, Montana, New Hampshire, Oregon) to over 10% in parts of Louisiana, Tennessee, and Arkansas.
Estate and inheritance taxes matter for wealth planning. Twelve states plus DC levy estate taxes, and six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) have inheritance taxes. Federal estate tax exemption is currently $13.61 million per individual, but state thresholds can be much lower.
The Part-Year Residency Trap
When you move mid-year between states, both states will likely want to tax your income. Most states prorate based on the portion of the year you were a resident. However, some states are aggressive about claiming residency — New York and California are particularly notorious for auditing departed residents who maintain any ties such as a home, a driver license, or a membership.
Establish residency in your new state immediately: update your driver license, register to vote, change your mailing address, and file your new state tax return as a resident from the date of your move.
Remote Work Complications
Remote work has created a tax nightmare for people who live in one state but work for an employer in another. Most states have adopted a convenience-of-the-employer rule or a days-worked threshold to determine tax obligations. New York is especially aggressive, taxing remote workers whose employer is based in New York even if they never set foot in the state. Consult a tax professional if your remote work arrangement crosses state lines.
Retirement Income Taxation
Retirees have the most to gain from tax-aware relocation since retirement income treatment varies wildly by state. Illinois exempts all retirement income from state tax, including Social Security, pensions, and retirement account distributions. Mississippi exempts all retirement income. California taxes every dollar of retirement income at regular rates.
The 13 states that tax Social Security benefits generally only apply the tax above certain income thresholds, so the actual impact depends on your total income level.
Making the Decision
Do not move solely for tax reasons. A state with no income tax but high property taxes, expensive housing, and limited services may cost more overall than a moderate-tax state with affordable housing and excellent public infrastructure. Calculate total tax burden including income, property, and sales taxes before concluding that one location is cheaper.