State Tax Rules When Moving Between States

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Moving to a new state changes more than your address – it changes your “tax home.”

This triggers complex rules that determine which state can tax your income. Your income is valuable revenue for state governments, and they’ve built systems to claim their share.

State Income Tax Landscape

Each state makes distinct policy choices about taxing citizens, creating a diverse and competitive landscape that directly affects your finances when relocating between states.

What State Income Tax Funds

State income tax is a direct tax levied by state governments on income earned by residents and income generated within state borders by nonresidents. This tax accounts for approximately 33% of all state tax collections.

This revenue funds essential public services including public and higher education from K-12 schools to state universities, healthcare programs and state-administered health services, and infrastructure like roads, highways, and transportation networks.

State income tax is separate from federal income tax paid to the IRS. While the two systems are related – most states use Federal Adjusted Gross Income as their starting point – similarities often end there. State tax laws, rates, procedures, and forms vary dramatically from state to state.

Three Types of State Tax Systems

States have adopted one of three primary approaches to income taxation.

Graduated-Rate Systems

This is the most common structure, used by 27 states and the District of Columbia. It mirrors the federal system by applying progressively higher tax rates to higher income levels through tax brackets.

For example, a taxpayer’s first $50,000 might be taxed at 3%, while income above that amount is taxed at 5%. States vary widely in their brackets. Hawaii has 12 brackets, while Virginia reaches its top bracket at $17,000. California has the highest top marginal rate at 13.3%.

Flat-Rate Systems

Fourteen states impose a single, flat tax rate on all taxable income, regardless of income level. In 2024, Colorado levied a 4.4% flat tax, while Arizona had a 2.5% flat rate. This system treats every dollar of taxable income the same.

No Broad-Based Income Tax

As of 2025, eight states don’t levy general income tax on wages and salaries: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire fully repealed its tax on interest and dividend income effective January 1, 2025.

Washington, while having no wage income tax, does levy a 7% tax on long-term capital gains for high earners.

*Washington taxes capital gains income for high earners.

No-Income-Tax States: Understanding the Trade-Offs

Living in a state with no income tax is appealing and has made Florida and Texas top destinations for Americans moving. However, no income tax doesn’t mean no taxes. State and local governments must still generate revenue for schools, police, and infrastructure.

Alternative Revenue Sources

To compensate for lacking income tax revenue, these states often rely more heavily on other sources.

Property Taxes: States like New Hampshire and Texas have some of the highest property tax rates in the nation. Lower income tax bills can be quickly offset by significantly higher annual property tax bills.

Sales and Use Taxes: States like Tennessee and Washington have some of the highest combined state and local sales tax rates in the country, affecting the cost of everyday goods and services.

Industry-Specific Revenue: Some states forgo income tax due to revenue from unique local industries. Alaska relies heavily on oil and gas sector revenues. Nevada generates substantial revenue from gambling and tourism taxes.

Moving to a no-income-tax state represents a fundamental shift in how you contribute to public services. A true assessment of a state’s “tax friendliness” requires analyzing the entire tax burden. Simply comparing income tax rates is insufficient and can lead to costly miscalculations.

A comprehensive financial picture must include projected costs for property taxes based on potential home values and sales taxes based on spending habits.

Which State Considers You a Resident?

When you move, the central question determining which state gets your money is: “Which state considers you a resident for tax purposes?” This is the most important concept in interstate taxation, as it dictates a state’s power to tax your income.

Why Residency Determines Tax Obligations

States have established a fundamental rule forming the basis of their taxing authority. A state where you’re legally considered a resident generally has the right to tax all your income from every source worldwide. This includes wages, investment income from brokerage accounts, and rental income from property located anywhere.

A state where you’re considered a nonresident can typically only tax income you earn from sources within that state’s borders. This is known as “source income” and most commonly includes wages for work performed in the state or rental income from property located there.

This distinction is paramount. If you successfully change your residency from high-tax New York to no-tax Florida, New York loses the right to tax your investment income. It can only tax income you might still earn from New York sources.

This is why states, particularly high-tax ones, have developed rigorous and overlapping tests to define residency.

Two Critical Tests for Tax Residency

States primarily use two distinct legal tests to determine if they can claim an individual as a tax resident. Understanding the difference between these tests is critical, as they operate independently and can sometimes lead to surprising results.

Domicile: Your “True Home” and Intent Test

Your domicile is the one place you consider your true, fixed, and permanent home. It’s the place you intend to return to whenever you’re away. While a person can have multiple residences – a city apartment, country house, winter condo – they can only have one domicile at any given time.

Domicile isn’t determined by a single document or simple declaration. It’s a subjective concept based on an individual’s intent, which must be proven by their objective actions and life connections.

When a state tax agency investigates a person’s domicile, it acts like a detective, piecing together a mosaic of facts to determine where that person’s “center of life” truly is.

Factors they examine include:

Official Connections: Where are you registered to vote? Which state issued your driver’s license?

Family Ties: Where do your spouse and minor children reside?

Financial Center: Where are your primary bank accounts? Where do you meet with your financial advisor or accountant?

Personal Possessions: Where do you keep your most cherished and valuable personal items, such as family heirlooms, artwork, or pets? States refer to these as your “near and dear” items.

Social and Professional Life: Where are your primary doctors and dentists? Where do you belong to religious or social clubs? Where are your main business connections?

An established domicile continues until a new one is acquired. To change your domicile, you must physically move to a new location with clear intention of abandoning your old home and making the new location your permanent home.

Statutory Residency: The 183-Day Rule and Presence Test

Even if your domicile is clearly in another state, you can be captured as a statutory resident for tax purposes in a second state. This test isn’t based on intent – it’s a purely objective, mathematical test based on your physical presence.

Generally, you’ll be considered a statutory resident if you meet two conditions:

You maintain a “permanent place of abode” in the state for substantially all of the year. A permanent place of abode is a dwelling place you don’t have to own that’s suitable for year-round use, like a house, apartment, or condo.

You spend more than a specified number of days in that state during the tax year. The most common threshold is 183 days (roughly six months).

For this rule, any part of a day spent in the state typically counts as a full day. The burden of proof is on the taxpayer to provide clear and convincing evidence of their whereabouts for every single day of the year.

This makes meticulous record-keeping – maintaining a detailed calendar and retaining credit card statements, travel itineraries, and phone records – a non-negotiable requirement for anyone with connections to more than one state.

Being a Tax Resident of Two States Simultaneously

The existence of these two separate tests creates a legal framework that can challenge taxpayers. It’s entirely possible to be considered a tax resident by more than one state in the same year.

Consider this scenario: A high-income executive has been domiciled in New York their entire life. They purchase a vacation home in Connecticut. They spend the entire summer and many weekends there, totaling 185 days in Connecticut for the year, while maintaining their New York apartment.

New York will claim them as a resident based on domicile. Their life, family, and professional ties are still centered in New York.

Connecticut will claim them as a resident based on statutory residency. They maintained a permanent place of abode in Connecticut and spent more than 183 days there.

Both New York and Connecticut can legally assert the right to tax that individual’s entire worldwide income for that year. This potential for double taxation highlights the aggressive stance states can take.

States aren’t bound to one theory – they can choose whichever test results in classifying an individual as a resident and capturing their tax revenue. This makes a taxpayer’s subjective intent legally irrelevant if their physical presence exceeds the statutory threshold.

How to Officially Change Your Tax Home

Changing your tax home isn’t as simple as forwarding your mail. It’s an evidence-building process requiring you to affirmatively sever ties with your old state and forge new ones in your new state.

Given that high-tax states are increasingly conducting aggressive residency audits, building a strong case for your domicile change is more important than ever.

Proving Your Intent: Establishing a New Domicile

The goal is creating an unambiguous record demonstrating you’ve abandoned your old domicile and established a new one with intent to remain there permanently. This involves a comprehensive change in your “general habits of living.”

The more actions you take to integrate into your new state, the stronger your case will be.

Official and Legal Actions

Driver’s License and Vehicle Registration: Obtain a driver’s license in your new state and surrender your old one. Register all vehicles in the new state.

Voter Registration: Register to vote in your new state and cancel your registration in the old one. If possible, vote in person in your new location.

Address Changes: File a permanent change of address with the U.S. Postal Service. Update your address with the IRS using Form 8822 and the Social Security Administration.

Declaration of Domicile: If your new state offers it (like Florida), file a formal “Declaration of Domicile” with the local county court. This is powerful evidence of your intent.

Estate Planning Documents: Update your will, trusts, and powers of attorney to reflect your new state of residence and conform to its laws.

Home and Property

Primary Residence: Purchase or sign a long-term lease for a primary residence in the new state. If possible, sell your former primary residence. If you retain it, convert it to a clear rental or vacation property and don’t treat it as your primary home.

Homestead Exemption: Apply for any available homestead property tax exemptions on your new primary residence and relinquish any such claims in your former state.

“Near and Dear” Items: Physically move your most important personal and sentimental belongings – family photos, heirlooms, valuable art, pets – to your new home.

Financial Life

Banking: Open your primary checking and savings accounts at a bank in your new state. Close your primary accounts in the old state, keeping only what’s necessary for residual business.

Safe Deposit Box: Move the contents of any safe deposit boxes to a new box in your new state and close the old one.

Update All Accounts: Change your address on all financial instruments: credit cards, brokerage and retirement accounts, loans, and insurance policies.

Personal and Social Ties

Professional Services: Establish relationships with new primary healthcare providers (doctors, dentists), as well as new legal and accounting professionals, in your new state.

Memberships: Join local religious organizations, gyms, social clubs, or community groups in your new location. If you retain memberships in your old state, formally change your status to “non-resident.”

Local Engagement: Obtain a library card, subscribe to local newspapers, and get local recreational licenses (fishing or hunting) in your new state.

Time and Presence

Spend Time in Your New Home: Spend significantly more time in your new state than your old one, and be mindful of the 183-day threshold for statutory residency in your former state.

Keep Meticulous Records: Maintain a detailed daily calendar or use a travel-tracking app to log your location. Retain receipts, boarding passes, and credit card statements that corroborate your calendar.

How High-Tax States Fight Back: The Residency Audit

States with high income taxes, such as New York and California, are well aware they’re losing significant tax revenue as high-income residents relocate to lower-tax states like Florida and Texas. These states have become increasingly aggressive in conducting residency audits.

In a residency audit, the state’s tax agency will challenge your claim of having changed your domicile. The burden of proof is entirely on you to demonstrate that you have, in fact, made a permanent move.

Auditors will act as forensic investigators, scrutinizing every aspect of your life. They will review:

Financial Records: Credit and debit card statements to see where you’re spending money on a daily basis.

Travel Data: Cell phone location data, E-ZPass and other toll records, flight records, and frequent flyer statements to track your physical movements.

Property Records: The size, value, and use of any homes you maintain in both states.

Social Ties: Where you celebrate major holidays and family events, and where your closest personal and professional relationships are centered.

The most powerful evidence of a domicile change often involves actions that create genuine personal or financial inconvenience. It’s easy to change a mailing address. It’s much harder, and thus more convincing to an auditor, to sell a long-time family home, move children to a new school district, or leave behind established professional networks.

A taxpayer’s willingness to endure these disruptions is a strong signal of their true intent to make a permanent move and should be documented with particular care.

Income Division: Who Taxes What and When

During the year of a move, a taxpayer’s income must be carefully divided between their old and new states. This process involves understanding your filing status for the year and applying complex “sourcing” rules that determine which state has the primary right to tax each type of income you receive.

Filing Status in a Move Year

Your tax filing obligations in a move year are determined by your residency status in each state.

Full-Year Resident: If you live in one state for the entire tax year, you’re a full-year resident. You’ll file a resident tax return in that state, which will tax your income from all sources worldwide.

Part-Year Resident: If you permanently move from one state to another during the tax year, you become a part-year resident of both states. You’ll need to file part-year resident tax returns in both your old and new states.

The general rule for a part-year resident is that each state gets to tax all income you received from any source while you were a resident of that state, plus any income you received from sources within that state’s borders while you were a nonresident.

Nonresident: If you didn’t live in a state at any point during the year but earned income from sources there (for example, you lived in New Jersey but worked for a week in California, or you own a rental property in Arizona), you must file a nonresident return in that state. The nonresident state can only tax the income that’s specifically sourced to it.

Sourcing Your Paycheck: Remote and Hybrid Work Complications

The rules for sourcing wage income were designed for a world where most people commuted to a single, physical office. The rise of remote and hybrid work has significantly complicated this landscape.

The General Rule

For decades, the standard rule has been that income from wages is sourced to the state where the employee physically performs the work. If you live in Connecticut and commute to an office in Massachusetts, Massachusetts has the primary right to tax your salary.

The Remote Work Challenge

Following this logic, if you live and work remotely from your home in Montana for a company based in California, only Montana – the state where you’re physically performing the services – can tax your income.

The “Convenience of the Employer” Rule

A handful of states – notably Connecticut, Delaware, Nebraska, New York, and Pennsylvania – have adopted an aggressive and controversial rule to counter revenue loss from remote work.

This rule states that if your employer’s office is located in one of these states, and you choose to work remotely from another state for your own convenience (rather than as a requirement of your employer), the employer’s state claims the right to tax 100% of your income as if you were physically working there every day.

This can lead to genuine double taxation if your home state doesn’t provide a full tax credit for the taxes paid to the “convenience” state.

Sourcing Investment and Capital Gains Income

The sourcing rules for investment income differ from those for wages and are critically dependent on the timing of the income relative to your move date.

Interest and Dividends

This type of “unearned” income is generally sourced to your state of residence (your domicile) at the moment you receive it. If you move from Illinois to Florida on June 30, any interest credited to your bank account on or before June 30 is taxable by Illinois. Any interest credited on or after July 1 is taxable only by Florida (which has no income tax).

Capital Gains from Real Property

The rule for real estate is straightforward and absolute: the gain from a sale is always sourced to the state where the property is physically located, regardless of where you live when the sale occurs.

If you establish residency in Nevada and then sell your former home in California, the capital gain is still considered California-source income and is subject to California tax.

Capital Gains from Intangible Property

This is where significant tax planning opportunities arise. The gain from the sale of intangible property is generally sourced to your state of residence (domicile) at the time of the sale.

This means the timing of your sale in relation to your move date can have a massive financial impact. Selling a large stock position with a significant gain on December 31 while still a resident of high-tax California would trigger a substantial state tax liability.

By waiting until January 2, after having successfully and verifiably changed your domicile to no-tax Texas, you could potentially eliminate the state tax on that gain entirely.

Installment Sales

The rules for sales where payments are received over multiple years are complex. For intangible property like stock, the gain is typically sourced to your state of residence at the time of the original sale, even if you receive payments after you move.

For real property, the gain remains sourced to the property’s physical location for all subsequent payments.

Sourcing Business and Freelance Income

For independent contractors, freelancers, and business owners, working across state lines creates a taxable connection, or “nexus,” in each state where services are physically performed.

If a consultant living in Ohio travels to Kentucky for a two-week project, they’ve likely created nexus in Kentucky and will need to file a Kentucky nonresident return to report the income earned during those two weeks.

For businesses with more substantial operations in multiple states, income must be divided, or “apportioned,” among them. States use specific formulas, often based on the percentage of a company’s total sales, property, and payroll located in that state, to determine the share of the business’s net income they’re entitled to tax.

How States Prevent Double Taxation

The U.S. tax system is designed to prevent the same dollar of income from being fully taxed by two different states. While situations like the “convenience of the employer” rule can create challenges, two primary mechanisms exist to mitigate double taxation: reciprocity agreements and tax credits.

Reciprocity Agreements: The “Good Neighbor” Policy

A reciprocity agreement is a pact between two, usually neighboring, states that allows a resident of one state who works in the other to pay income tax only to their state of residence. These agreements vastly simplify tax filing for millions of Americans who live in one state and commute to another for work.

For example, Pennsylvania and New Jersey have a reciprocity agreement. A resident of Pennsylvania who works in New Jersey can file a form with their employer (Form NJ-165) to be exempt from New Jersey income tax withholding. Their employer will then withhold Pennsylvania taxes instead.

At the end of the year, that individual only needs to file a Pennsylvania resident tax return.

These agreements typically apply only to wage and salary income. Other types of income, such as income from a business or rental property, are generally not covered.

States with Reciprocal Tax Agreements

Credit for Taxes Paid to Another State

When income is taxed by two states and no reciprocity agreement applies, the primary tool to prevent double taxation is the credit for taxes paid to another state.

The universal rule is that your home state (state of residence) will grant you a tax credit for the income taxes you were required to pay to the other (nonresident) state on the same income.

However, this credit comes with a critical limitation: the credit is generally capped at the lesser of two amounts – the actual tax liability you paid to the other state, or the amount of tax your home state would have charged you on that same income.

This limitation means that while you’re protected from being taxed twice, you’ll effectively pay tax on that income at the higher of the two states’ tax rates.

Step-by-Step Calculation Example

Imagine a taxpayer who is a full-year resident of Colorado (a 4.4% flat tax state). They earn a total modified AGI of $125,000 and have a gross Colorado tax liability of $5,000. During the year, they also earned $25,000 of that income in State A (a high-tax state) and $5,000 in State B (a moderate-tax state).

Step 1: Complete nonresident returns first. The taxpayer files returns in State A and State B and determines their actual tax liability. The tax paid to State A is $800 and the tax paid to State B is $300.

Step 2: Calculate the Colorado tax attributable to the other states’ income.

For State A: Colorado determines how much tax it would have charged on the $25,000 earned there. The formula is: (Income from State A / Total CO Income) x Total CO Tax. ($25,000 / $125,000) x $5,000 = 0.20 x $5,000 = $1,000. The Colorado tax attributable to the State A income is $1,000.

For State B: The same calculation is performed. ($5,000 / $125,000) x $5,000 = 0.04 x $5,000 = $200. The Colorado tax attributable to the State B income is $200.

Step 3: Compare and take the lesser amount for each state’s credit.

State A Credit: Compare the tax paid to State A ($800) with the CO tax on that income ($1,000). The lesser amount is $800. This is the credit for taxes paid to State A.

State B Credit: Compare the tax paid to State B ($300) with the CO tax on that income ($200). The lesser amount is $200. This is the credit for taxes paid to State B.

Step 4: Sum the credits. The total credit for taxes paid to other states on the Colorado return is $800 + $200 = $1,000. The taxpayer’s final Colorado tax bill of $5,000 would be reduced by this $1,000 credit.

This example illustrates the key principle: the taxpayer paid a total of $1,100 ($800 + $300) to the other states but only received a $1,000 credit from Colorado. The credit prevented Colorado from also taxing that income, but the taxpayer still effectively paid the higher tax rates imposed by the nonresident states on that portion of their earnings.

Other Financial Impacts of Moving

While income tax is often the primary focus, a complete financial picture of an interstate move requires considering several other significant state and local taxes. These can have a substantial impact on your overall cost of living and long-term financial planning.

Property Taxes: The Other Side of the Tax Burden

Property taxes are the main source of funding for local governments, particularly for public school districts. As discussed, states with low or no income tax often have high property taxes to compensate.

Before moving, research the effective property tax rates in the specific county and city you’re considering. These rates, often expressed as a percentage of a home’s fair market value, can vary dramatically even within the same state.

Additionally, investigate the availability of homestead exemptions for primary residences. These exemptions can shield a portion of your home’s value from taxation, providing significant relief.

Sales and Use Tax: From Daily Purchases to Your Car

State and local sales taxes directly affect the price of goods and services. A move from a state with no statewide sales tax, like Oregon, to a state with a high combined rate, like Louisiana, will be noticeable in your daily budget.

A specific consideration when moving is the tax on your vehicle. When you move and register your car in a new state, you’ll likely be required to pay a use tax. This is the equivalent of the state’s sales tax, applied to the fair market value of your vehicle at the time you bring it into the state.

To prevent double taxation, most states will provide a credit for any sales tax you already paid on the vehicle to your former state. Some states have special rules for new residents; Texas, for instance, charges a flat $90 new resident tax on a vehicle brought into the state, which is often much lower than the standard use tax would be.

Estate and Inheritance Taxes: Planning for the Long Term

Your choice of domicile has profound implications for how your assets will be taxed upon your death. While the federal government has an estate tax with a very high exemption ($13.61 million per individual in 2024), many states have their own, separate taxes with much lower exemption amounts.

It’s critical to understand the distinction between the two types of state “death taxes”:

Estate Tax: This is a tax on the deceased person’s total net worth (their “estate”), paid by the estate before any assets are distributed to heirs. The decedent’s domicile at the time of death determines whether their estate is subject to this tax.

Inheritance Tax: This is a tax levied on the heirs who receive the property. The tax rate often depends on the heir’s relationship to the deceased. For example, in Pennsylvania, transfers to a spouse are tax-free, transfers to direct descendants are taxed at 4.5%, transfers to siblings at 12%, and transfers to other heirs at 15%.

Moving from a state with a low-exemption estate tax to a state with no death tax can be one of the most powerful estate planning moves a person can make, potentially saving their heirs millions of dollars.

However, be aware that any real estate you own that remains physically located in a state with an estate tax will likely still be subject to that state’s tax, even if you’re no longer a resident.

*Maryland is the only state that imposes both an estate and an inheritance tax.

The optimal state of residence for tax purposes can change over a person’s lifecycle. A young, high-income professional might prioritize a state with no income tax. A retiree with a high-value home but less earned income might focus on states with low property taxes.

An individual with significant wealth focused on their legacy will prioritize moving to a state with no estate or inheritance tax. This makes the choice of domicile not just a logistical decision, but a critical, strategic element of long-term, multi-generational financial planning.

Strategic Timing Considerations

The timing of various financial events in relation to your move can have significant tax implications. Understanding these timing considerations can help you optimize your tax situation.

Income Recognition Timing

For those moving from high-tax to low-tax states, timing income recognition can provide substantial savings. This includes exercising stock options, realizing capital gains, or taking retirement account distributions after establishing residency in the new state.

Conversely, those moving from low-tax to high-tax states may want to accelerate income recognition before the move to take advantage of lower rates.

Business Income and Move Timing

Business owners have additional considerations. The timing of business sales, the structure of ownership transitions, and the location of business activities all factor into the tax implications of a move.

Retirement Income Planning

Retirees have unique opportunities to optimize their tax situation through strategic moves. Some states don’t tax retirement income, while others provide significant exemptions for seniors.

Understanding how your specific retirement income sources (Social Security, pensions, 401(k) distributions, etc.) are treated in different states can inform your relocation decision.

Our articles make government information more accessible. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances.