Should I Move Out of California When I Retire to Save on Taxes?

You probably know someone asking the question if you’re not asking it yourself: “Should I move out of California when I retire to save on taxes?” It’s a question our financial planning firm in Roseville and Folsom, CA, gets a lot. People are sure that life will be cheaper outside of California, but they often get a surprise when we run the numbers.

If you’re thinking about a retirement move out of the Golden State to save on taxes, here are some considerations before you start packing.

Income Taxes

No doubt about it, California’s top income tax bracket—at 13.3%—is the highest in the country. But as the article “Relocate Out of California to Escape High Taxes After Retirement?” points out, you need to make more than a million a year to be subject to that rate. Even if you pay that rate in your professional years, you will likely have less income in your retirement, which means your income tax rate will drop too.

Make sure to compare your projected income tax brackets in California against the income taxes you would pay in other states. If possible, do the calculation over multiple years and retirement phases to gain a complete picture. 

Points to keep in mind: Some states, such as Utah, have a flat income tax, which means you always pay that rate no matter what your income is. This could work for or against you, which is why it’s key to run the numbers.

Sales Taxes

Some states, such as Nevada, can seem particularly alluring since they don’t levy income taxes. However, it’s essential to look at the other taxes states charge, like sales taxes. Remember: State initiatives (think education, road maintenance, etc.) must be funded somehow, and taxes are the favored way to do it.

At 7.75%, Californians “enjoy” the highest sales tax rate in the nation. But it’s important to understand not just the state rate, but the local sales tax where you move. For example, according to Tax-Rates.org, California’s average local sales tax is 0.94%, bringing the total to 8.44%.

Nevada’s state income tax is 6.85%; the average local sales tax is 1.09%—making the average combined rate 8.17%. Is the difference between California’s and Nevada’s sales tax worth moving for? This is what makes the big-picture view crucial. 

You should also consider what you are giving up for a lower tax rate. For example, according to this CNBC article, South Dakota (4% state sales tax) spends the least on education of all the Midwest states. 

Property Taxes

In California, your property tax can increase just 2% per year based on your home’s value. Other states lack this limitation, which means you may pay more real estate taxes in your new state. For example, if you moved to Texas, you can expect to pay an average of $1,993 in taxes per $100,000 of your home’s assessed value, according to the article “Should You Relocate to Trim Taxes in Retirement?”

Thanks to Proposition 19, Californians age 55 and older can transfer their home’s property tax assessment to another property anywhere in the state up to three times, which can be helpful if you are on a fixed income in retirement.

Is It Worth It?

This blog may make it seem like our wealth management firm wants everyone to stay put in California. Not so. Each person’s situation is unique, and it is our responsibility as a fiduciary financial planner to advise each client based on their best interests. 

For some, that might mean leaving the state. For others, it can mean staying. 

In exploring your options, we suggest you analyze your retirement income and costs, including taxes, in California versus your potential new home state. But don’t stop at the dollars and cents of your decision. 

Consider whether you will have family and friends nearby to support you. Will you need to travel back to California regularly to visit loved ones (which can get expensive)? Will you have easy access to medical facilities? Can you enjoy your favorite activities in your new state? Do you like the weather? Have you spent extended vacations in your potential new neighborhood so you are certain you love it?

These quality-of-life decisions may outweigh the high cost of living, including taxes (which can end up less than you thought). 

Consider working with a financial advisor to calculate how much you would actually save so you can make an informed decision.

Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.