Tax Gotcha - Cost of Living Relocations

I want to take a couple of minutes to write about a cost-of-living topic today. This comes from conversations I have with clients when we do their deep tax planning every summer. It is part of what could be a “tax gotcha” down the road. Let me explain.

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We go through a checklist of things during this tax planning meeting. Everything from harvesting losses to carryforward losses to filling up tax brackets with Roth conversions. One thing we also talk about is whether it may make sense to move to a lower tax state in retirement. However, my experience is it is a lot more than just taxes.

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When talking about where to retire, most media articles focus on state income tax rates and whether Social Security is taxed. It is so much more than that. I am going to pick on the great state of Louisiana (LA) for this example.

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State income tax in LA is below the national average.

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Also, they do not tax Social Security income.

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Louisiana leads the nation with the highest combined state and local sales tax rates. This clocks in at 9.56%.

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The sales tax number catches my eye due to a set of clients. They moved from OH to what they describe as a living in a tourist town in New England. They also mentioned how they used to be able to go out for a couple of burgers for $25 in OH and it now costs them double that.

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Additionally, you have to consider things like home insurance. Zillow has a new feature where you can see various climate risk ratings for homes, such as fire, flood and wind risk. This is critical to consider with retirement. Having a great house in a beachfront community is the dream of a lot of people. But what happens when you cannot afford or even get insurance on this house.

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Thanks for sticking around to the end. I will wrap up with two points.

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First, make sure you are considering the total financial picture when it comes to potentially relocating to a “lower cost” location. Basically, be sure to look at the forest and not just the trees (is Social Security taxed).

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Next, this advanced tax planning is something you should expect and receive from your financial planner. Almost every single high-income earning client expects it, but studies show less than 25% of advisors even ask for clients’ tax returns. Be sure you are getting the tax planning advice you need.

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Final Final comment – I am writing this before Election Day. It will be interesting to see what happens in North Dakota as they are considering getting rid of property taxes.