Tax season is over, but for many retirement-age taxpayers in high income tax states, their tax bills landed harder than expected.
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Income tax shock is real, and it’s not confined to the top of the wage scale. Clients across the income spectrum, from wage earners to retirees drawing on deferred accounts, are running the same math and arriving at the same question. Is it time to move?
Fidelity’s
What Fidelity actually measured
Fidelity compared 12 Sun Belt states — Alabama, Arizona, Florida, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, South Carolina, Tennessee and Texas — across four categories that drive the true cost of relocation: state income tax, property tax, homeowners and auto insurance, and home prices.
The results are not what the brochure promises.
Florida and Texas, the two states most aggressively marketed as tax havens, ranked worst on combined insurance costs. Florida’s average combined homeowners and auto premium sits around $9,550, the highest in the Sun Belt. Texas property taxes average 1.47% of assessed value, roughly double the national median. Tennessee has no wage income tax and low property taxes but layers on combined state and local sales taxes that routinely exceed 9.5%, among the highest in the country. Arizona’s flat 2.5% income tax looks attractive until you price insurance in wildfire-exposed counties.
Where the practitioner exposure lives
There are three places where this goes wrong, and all three could come back to haunt us.
First, the domicile analysis. Every state in the Sun Belt is happy to accept a new resident. The state the client is leaving is often not. High-tax states, not just New York and California, run active residency enforcement programs. Connecticut, Illinois, Massachusetts, Minnesota and New Jersey all pursue domicile audits on departing high earners, and the burden of proving a completed domicile change sits on the taxpayer by clear and convincing evidence. A Tennessee driver’s license does not win that audit. Contemporaneous documentation does.
Second, source income does not move with the client. Deferred compensation earned in the old state, equity compensation vested before the move, K-1 income from pass-throughs with nexus in the old state and gain on the sale of real property located there all remain taxable at the source. Convenience-of-the-employer rules in Delaware, Nebraska, New York and Pennsylvania can continue to pull wage income back across state lines even after the move. Clients hear “no state tax” and assume it applies to everything. It does not.
Third, the cost math the client ran is wrong. Fidelity’s analysis makes this concrete. A client saving $40,000 a year in state income tax who then pays $9,500 in combined insurance, $18,000 in property tax on a $1.2 million Texas home, and 9% sales tax on their consumption has not saved what they think they saved. Run the five-year number before they move, not after.
What practitioner social media is telling us
Practitioner-adjacent threads on Reddit and other social media platforms are remarkably consistent. The phrase that keeps appearing is some version of “you don’t retire in a property tax state; you work in one and retire to an income tax state.” Taxpayers are figuring out in public what many of our clients have not figured out in private. Zero-income-tax states fund themselves somehow. That funding mechanism is often more regressive and less predictable than the income tax the client just escaped.
The other consistent theme: surprise. Clients are surprised by insurance renewals in Florida. Surprised by property tax bills in Texas. Surprised by sales tax in Tennessee. Surprise is what audit letters and estate disputes are made of.
What to do before your client moves
1. Run a full five-year landed-cost model covering income tax, property tax, insurance, sales tax and the cost of maintaining any retained residence in the old state.
2. Build the domicile file contemporaneously: day-count log, near-and-dear items, professional relationships, voter and vehicle registration, will and trust governing law. Not next April. Now.
3. Address source income separately. Accelerate, defer or restructure before the move, not after, especially for deferred comp and equity.
4. Review the estate plan against the new state’s probate, homestead, community property and elective share regimes. Arizona, Louisiana, Nevada, New Mexico and Texas are community property jurisdictions. That changes basis planning, creditor protection and trust funding.
5. Coordinate trust situs, trustee residency and funding with the new domicile so the income tax savings actually flow through.
6. Assume a residency audit from the departing state in year one for any client above the high-earner threshold.
Final thoughts
Fidelity’s analysis shines a light on considerations every practitioner needs to put in front of clients well before the moving van is booked. “Tax-free” is a slogan. Total tax cost is a number. As trusted advisors, our clients rely on us to know the difference and to raise it before they do.
Have the conversation now. Not after the audit letter arrives.
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