Whether your company has decided to move its headquarters or operations to a new state or asked you to move to a different office location, you likely have a myriad of questions running through your mind. Where will I live? How are the schools? What's the cost of living difference? Who are the best doctors? And on and on.
You should consider a number of financial issues as well, some of which may not be top of mind. Here are a few tips to help make the financial transition as smooth as possible and avoid some unexpected turns.
Income Taxes
Evaluate the state income tax structure. If you are moving to a state with a higher income tax rate, depending upon how much advance notice you are given, it may make sense to recognize some income before you move, such as capital gains in your portfolio or exercise of stock options. Certain states have recapture rules whereby if you earned income while working in State A, but move to State B when that income is actually paid out to you, State A may argue they have claim to their share of the tax burden.
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In my home state of Georgia, for example, the top state income tax rate is 6% whereas Georgia's sunny neighbor to the south, Florida, has a 0% state income tax rate. That makes it seem tempting to move one state away before incurring a large amount of taxable income, but you should consult with a certified public accountant familiar with both states before you make a big income recognition decision.
If you are moving to a state with a higher tax rate structure, such as California, your take-home paycheck may be lower than you expected, so do some quick math before you sign your relocation and cost of living adjustment package. You may need to negotiate a higher salary to keep pace with your projected after-tax living expenses. Don't forget about property taxes and sales taxes which tend to be higher in states that don't tax your income.
Also, moving expenses that you incur and are not reimbursed by your company may be tax deductible, so keep your receipts for all moving-related activities and talk with your CPA.
Estate Plan
Update your will. Estate tax and probate matters vary from state to state. If you relocate, your will needs to be updated and possibly amended for different state laws. In addition, you may suddenly need a trust due to tax, legal or probate matters in your new state. Plus, if you own out-of-state property, such as your former residence, that you plan to keep or rent out for a long time, having that asset held in a revocable trust or an limited liability company may help avoid probate costs.
The same updating guidance holds true for your financial and health care powers of attorney, as these forms and statutory provisions vary from state to state as well. Of course if you don't have your estate planning documents in place, use this as an opportunity to button up this part of your financial plan!
College Savings
Consider the college savings 529 plan in your new state. While saving for college is a major goal for a lot of working families, and there are numerous quality plans to choose from, consider whether there are any benefits to start funding the 529 plan offered by your new state of residence. For example, do you qualify for a state income tax deduction on contributions made to your home state's 529 plans? Do you like the investment option better in your new state's plan?
Finally, those who have children in high school may need to reconsider in-state vs. out-of-state tuition, as their residency is now changing. What do in-state scholarship opportunities look like in your new state?
Cost of Living, Especially Education
Cost of living is often a major factor in one's relocation package from their company. In addition to knowing how much more housing and recreation may cost, consider the school system and whether you do or do not want your children enrolled in private school. Tuition can be a substantial budgetary item for any family, and if you've never had to pay it before, you certainly need to plan ahead for how these bills will get paid (more salary, use of bonus each year, savings, etc.) Your education expenses may influence what part of town you live in, how much house you buy and therefore your mortgage payment. All of these are cash flow considerations, but be careful not to raise your lifestyle expenses so much upon this move that you throw your long-term financial plan out of alignment.
Investments
Your investment strategy may also need some fine tuning. If you own municipal bonds in your portfolio that are tax-exempt from your original state, they may not be in your new home state. In addition, certain states such as South Carolina exempt a portion of your capital gains from income tax. Dividends are not taxed in Nevada (which is a 0% income tax state). So consult with a CPA to understand investment taxes so you can adjust your portfolio holdings if necessary. While you should not let taxes drive investment strategy, it is prudent to be tax aware.
Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta wealth management firm. She specializes in investment management, executive compensation, retirement transition and estate planning.
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