Which would you rather spend money on, taxes or travel? Taxes can have a huge impact on the amount of money you can spend on travel, so this is one of the first things to consider when beginning to turn your wanderlust dreams into reality. Here are tax situations any would-be nomad should consider.
Minimizing taxes can add thousands of dollars a year to your disposable cash flow. That may enable you to travel farther and longer than would otherwise be possible. The biggest factor in the taxes you’ll pay is your state of residence. As a would be nomad, you need to decide which state you’ll formally “reside” in.
If you want to retain a home to live in part of the year, you will likely find it difficult to avoid state and local taxes by claiming residence in a different, low tax state. If this describes you, consult a tax expert to ensure you understand what to expect.
The rest of us are free to choose whichever state we want. There are a few things you’ll want to look at when deciding on your state of residence. Below we delve into the major types of taxes you may want to consider.
Income taxes are charged by many states and municipalities on money you receive, unless that money is specifically exempted or addressed in a different way in the tax codes. This can include wages; business profits; dividends, interest and capital gains; Social Security income; and more.
Most people start narrowing their search for a new home state by looking at income taxes. Specifically they assess whether any of the low- or no-income-tax states fit what they’re looking for in a new “home” state.
That’s where we started. Seven states don’t tax any of their residents’ income. Those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In addition, Tennessee & New Hampshire only tax dividends and interest, not other income.
Choosing one of these states could save you thousands of dollars annually, especially if you’ll be moving from a high-tax state like California, where the top rate is 12.3%, or New Jersey, which tops out at 10.75%.
https://turbotax.intuit.com/tax-tips/fun-facts/states-with-the-highest-and-lowest-taxes/L6HPAVqSF
States’ rules for taxing remote workers’ income is evolving. A lot of people are now working remotely, and this has given them the opportunity to live in a new place without having to find a new job. This increased mobility is having a negative impact on some state’s income tax revenues, so those states are starting to look closely at how remote workers’ income is taxed.
There are also variations in the rules and regulations from state to state, and from city to city, about where income gets taxed. Some places tax income based on where you live, some tax income based on where you earn it, and “where it’s earned” can vary from state to state.
Income taxes can be a challenge to understand, so take your time and keep researching if you still have questions. If you are a remote worker, you may want to talk with a tax professional before you set your sites on moving to a no-income-tax state.
Another type of income you may want to think about is retirement income. Social Security benefits and distributions from individual retirement accounts (IRAs) and retirement plans are the main types of retirement income. Retirees and soon-to-be retirees should look at these taxes before making a decision on a state of residence.
In addition to the no-income-tax states, the following states exempt retirement income from taxation: Illinois, Mississippi, New Hampshire, Pennsylvania and Tennessee.
Retirement and non-retirement income taxes will have a large impact on the amount of money you have to spend on travel. There may be other state or local taxes you want to keep in mind too. These include taxes on any inheritances (lucky you!) or on your estate.
Thirty-three states have either an inheritance or an estate tax. Of the no- and low-tax states, Illinois and Washington both assess a tax on residents’ estates, and Pennsylvania taxes inheritances its residents receive.
While sales taxes and property taxes are also assessed at the state and local levels, they are lesser considerations at this point. Sales taxes will only come into play when you’re actually in your new state of residence. Being a nomad, that shouldn’t be often or for very long. Property taxes are a factor to consider when contemplating a different decision, whether to buy or hold real estate.
We followed this process when we decided to make our dreams real. The list of no-income-tax states was the starting point for the next steps in our assessment, identifying how to get the best healthcare coverage and having someone else manage our mail for us. Check out Going Nomad, Where to Start to see our process.
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