How state residency choices affect your income tax
A person’s state residency determines which state(s) can tax their wages, retirement income, capital gains and other income. States use differing tests—domicile (your permanent home), statutory residency (day-count rules), and connections (voter registration, driver’s license, property ownership)—to decide whether you’re a resident for tax purposes. Choosing a lower-tax or no-income-tax state can meaningfully lower your annual state income tax, but successful moves require convincing documentation and a genuine change of lifestyle.
(For a primer on legal residency definitions and related audits, see our internal guide: State Tax Residency.)
Who benefits most from changing residency?
- High-income earners and business owners who face steep state income tax rates.
- Recent asset-sale beneficiaries (start-up exits, property sales) who face large, time-concentrated income.
- Retirees whose major income (pensions, Social Security, withdrawals) is taxable by states.
- Remote workers and digital nomads who can sever ties to a high-tax state and establish residency elsewhere (see: State Residency Rules for Digital Nomads and Remote Workers).
In my practice I’ve seen clients save tens of thousands per year when their move was well-documented and their work and family situation supported the change. But I’ve also assisted clients who failed to sufficiently cut ties and faced state residency audits—so planning and record-keeping matter.
Common state residency tests (what states look for)
- Domicile: Where you intend to make your permanent home. A move requires both physical relocation and an intent to remain.
- Days-in-state: Many states treat you as a resident if you spend a threshold number of days there (commonly 183 days).
- Significant connections: Voter registration, driver’s license, vehicle registration, professional licenses, primary physician, utility bills, and where your family lives.
- Source-of-income nexus: Some states tax income earned from work performed inside the state or business activities conducted there.
States also examine indirect evidence: social memberships, mailing address on tax forms, and presence of family. The more ties you sever with the old state and build in the new state, the stronger your position.
Practical steps to change residency correctly
- Choose the target state based on the whole tax picture. Consider not just income tax rates but property taxes, sales taxes, local taxes, and estate taxes.
- Establish physical presence: rent or buy a primary residence and move the majority of personal possessions.
- Update government records: get a driver’s license, register your vehicle, register to vote, and file a declaration of domicile if the state allows one.
- Move financial ties: change your address for bank accounts, retirement plan statements, and investment accounts; move safe-deposit boxes; update beneficiary addresses.
- Sever ties to the old state: sell or rent out old home (if feasible), cancel local memberships, inform the post office, and shift primary care and professional relationships.
- Document everything: keep dated receipts, lease agreements, closing documents, utility bills, cell-phone records, travel logs, and copies of updated registrations.
- Time your move: moving late in the tax year or mid-year has different implications; pro-rate considerations may apply and you may need to file part-year resident returns.
Documenting intent is as critical as the move itself. Courts and revenue departments weigh both facts and intent when deciding residency.
Tax mechanics you must watch
- Part-year resident returns: Most states require you to file part-year returns the year you move, allocating income earned while a resident and while a nonresident.
- Source-based taxation: If you earn income from your former state (rental, business, or W-2 hit by nexus), you may still owe tax there as a nonresident.
- Retirement income rules: Some states tax pension and retirement distributions differently—some exempt Social Security while others tax pensions.
- Capital gains: States generally tax capital gains as ordinary income when you are a resident, so timing of asset sales around a move matters.
Always check state statutes and guidance; for federal rules that interact with residency (e.g., allocation of deductions), consult the IRS and state revenue department pages. See the IRS residency guidance at https://www.irs.gov for federal-level concepts.
Costs and non-tax considerations
- Moving costs: physical relocation, real estate transaction costs, and time.
- Lifestyle: proximity to family, quality of medical care, schools, and climate.
- Business operations: if you run a business, moving your domicile may trigger new registration, franchise taxes, payroll withholding changes, and regulatory compliance.
A move that saves state income tax could still be a net loss if property taxes or higher living costs offset the savings. Use a full after-tax cash-flow model that includes one-time moving costs and ongoing recurring differences.
Real-world examples and timing strategies
- Example 1 — High earner exit: A tech founder with a large liquidity event can save by establishing domicile in a no-income-tax state before recognizing gain. Timing and bona fides are crucial—moving months before the sale with supporting documentation reduces audit risk.
- Example 2 — Retirees: Retirees who shift residency to states without income tax or with favorable treatment of retirement income can reduce lifetime tax drag. Re-check beneficiary and estate tax implications.
- Example 3 — Remote workers: Remote workers who are free to move can often choose a low-tax state, but must be careful of the employer’s payroll withholding and state nexus rules. Our article on Multistate Filing for Remote Workers: Residency and Withholding covers withholding complications.
Documentation checklist to withstand an audit
- Lease or deed showing start date of residence in the new state.
- Driver’s license/ID, voter registration, and vehicle registration in the new state.
- Utility bills and cell-phone bills showing regular use at the new primary address.
- Change-of-address confirmations (USPS), mail forwarding records, and updated employer/payroll records.
- Travel logs showing number of days spent in each state (use calendar exports, credit card and phone location data).
- Records of professional changes (new doctors, dentists, lawyers) and club/membership cancellations in old state.
Maintain a file that strings together the narrative—“I moved on X date, changed my driver’s license on Y date, sold my home on Z date”—with backup documents.
Common mistakes and misconceptions
- Simply claiming residency without cutting ties is risky. Revenue agencies and courts look for the totality of circumstances.
- Focusing only on income tax rate. Some low-income-tax states have high property or sales taxes that can negate benefits.
- Ignoring business nexus: Running a business in the old state can create continuing tax obligations there.
Read our related comparisons on legal concepts and audit risk in Residency vs. Domicile for Tax Purposes.
When a residency change may not be worth it
- When moving costs, lifestyle tradeoffs, and business disruptions exceed tax savings.
- If ongoing income sources remain sourced to the higher-tax state (e.g., rental income, partnership allocations).
- If you cannot convincingly sever substantial ties to the old state.
Next steps and professional resources
- Run a modeled projection comparing after-tax cash flow in your current state vs. target states across 3–5 years.
- Consult both a CPA with multistate experience and an attorney if you have significant assets or business interests.
- Keep contemporaneous records during the move and the 12–36 months afterward to document intent.
Authoritative sources: Internal Revenue Service (IRS) guidance on residence and source rules at https://www.irs.gov and state revenue department pages; Consumer Financial Protection Bureau guidance on moving and financial accounts at https://www.consumerfinance.gov. For state-specific residency rules and remote-work impacts, see our internal coverage: State Residency Rules for Digital Nomads and Remote Workers, Multistate Filing for Remote Workers: Residency and Withholding, and State Tax Residency.
Professional note: In my practice I review client moves with a checklist and a 3‑year documentation plan. Tax authorities often audit moves that coincide closely with large taxable events; robust pre-move planning and contemporaneous evidence reduce audit risk.
Disclaimer: This article is educational and does not constitute legal, tax, or financial advice. Rules vary by state and facts matter—consult a qualified CPA or tax attorney to evaluate your personal situation before changing residency.