đź’° Moving to save dividend taxes

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Understanding State Taxes Before Moving

Relocating to save on taxes can be a smart move, especially for those relying on dividends. Some states impose heavy taxes on investment income, making them less favorable for investors.

The top federal tax rate on personal dividend income is 23.8%, which includes a 20% top marginal rate plus a 3.8% net investment tax under the Affordable Care Act. State-level dividend taxes vary significantly, ranging from zero in states without personal income tax to as high as 13.3% in California.

Californians face the highest combined dividend tax rate in the U.S. at 33%, followed by Hawaii at 31.6% and New York at 31.5%. In contrast, residents of states with no personal income tax—such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—pay only the federal rate of 23.8%.

While most tax-free states don’t impose additional dividend taxes, New Hampshire levies a 5% tax, and Tennessee’s Hall Tax previously applied a 6% rate, though it was fully repealed in 2021. Nationwide, the average top marginal dividend tax rate is 28.6%.

Since dividend taxes effectively double-tax corporate profits, they significantly increase the burden on capital. If minimizing taxes is a priority, moving to a state with no personal income tax and no separate dividend tax could provide substantial savings. However, relocation involves more than just tax considerations—factors like cost of living, housing, and business opportunities should also play a role in the decision.

States Without Income Tax

The following states do not impose state income taxes:

  • Alaska

  • Florida

  • Nevada

  • South Dakota

  • Tennessee

  • Texas

  • Washington

  • Wyoming

New Hampshire also does not tax W-2 wages, but it does tax dividend, interest, and certain business income above specific thresholds.

Employer-Paid Moving Expenses

If your employer is covering your moving costs, be aware that some reimbursed expenses may be tax-free, while others might be considered taxable income and reported on your Form W-2.

Rental Property in Your Former State

If you decide to rent out your home in your old state, you will likely need to file a tax return there to report rental income and expenses. Even if you establish residency in your new state, your old state may still tax rental income. However, your new state may offer a credit for taxes paid on that income.

If your rental generates a loss, filing a return in your old state could be beneficial, as you may be able to carry the loss forward to offset future taxable rental income.

Living in Multiple States in One Year

If you move twice in a single year and live in three different states, you may be required to file tax returns in all three. Be sure to review each state's filing requirements carefully.

Interest and Dividend Income

Interest and dividend income is generally taxable in the state where you are a permanent resident. For example, if you move from Arizona to California, California will tax the interest earned on your Arizona bank accounts while you are a California resident. However, if the income is tied to a business in your old state, both states may tax it, and you may need to claim a credit on your new state's tax return.

State-Tax-Exempt Investments

Certain investments that were tax-exempt in your former state may be taxable in your new state. For instance, municipal bonds issued by North Carolina agencies are tax-free for North Carolina residents but could be taxable if you move to Idaho. Review your financial portfolio to understand potential tax implications.

Federal Tax-Exempt Investments

While states generally do not tax federal obligations like Series EE bonds or Treasury notes, definitions of "federal obligation" vary. Some states exempt investments that are backed by the federal government, while others tax them unless the investment is directly in the government itself.

Retirement Income Taxation

Most states that impose an income tax also tax retirement income, but the rules vary. Some states provide exemptions or deductions for retirement income, while others exclude certain pensions altogether.

For example:

  • Utah allows a set deduction for qualified retirement income based on age.

  • Louisiana exempts state and local government pensions and offers tax breaks for private pensions.

Federal law states that if you receive retirement income from your old state but move elsewhere, your new state can tax that income, while your old state cannot.

If your income isn't subject to state tax withholding—such as investment or pension income—you may need to make estimated tax payments in your new state. Failing to do so could result in penalties for underpayment.

How States Calculate Income Tax

Most states determine taxable income based on your federal Adjusted Gross Income (AGI), but they may differ in how they handle deductions and tax credits. Key questions to consider include:

  • Itemized Deductions: While many states follow federal guidelines, some impose a fixed deduction amount regardless of your federal return.

  • Deducting State Taxes: Most states do not allow deductions for state income taxes paid, but some permit a deduction for a portion of federal income taxes paid.

  • Federal Tax Changes: While many states use the Internal Revenue Code (IRC) as a starting point for tax calculations, some have not fully adopted recent federal tax changes or selectively incorporate parts of the IRC.

Final Thoughts

Before relocating, take the time to understand how your move will impact your taxes. Reviewing state tax laws and planning ahead can help you avoid surprises and maximize tax savings in your new home.

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Nothing in this newsletter is financial advice. Always do your own research and think for yourself.