September 5, 2013

Facebook co-founder Eduardo Saverin gave up his United States citizenship last year in favor of citizenship in Singapore to avoid the increase in federal income taxes mandated by the end of the Bush-era tax cuts for the top tier of income earners. You may not be willing to give up your American passport to avoid taxes, but what if you were to move to a cheaper state? Between 2000 and 2010, Illinois, New York and Ohio lost millions in population while Texas, Florida and Arizona all gained residents, according to the Tax Foundation.

During that period, New York State lost $45.6 billion in income as workers moved to other states. California lost $29.4 billion, Illinois lost $20.4 billion, New Jersey lost $15.7 billion and Ohio lost $14.7 billion. By contrast, during the same period, Florida gained a whopping $67.3 billion in income, Arizona gained $17.7 billion and Texas gained $17.6 billion in income as workers migrated into those states.

Cold Weather, Heavy Tax Burdens

No doubt, there were several factors involved, including the loss of heavy manufacturing jobs, along with cold weather climates in states like New York and Illinois, contrasted to warm-weather states like Florida, Arizona and Texas. Nonetheless, a primary motivator for many of these interstate moves was a desire to reduce state tax burdens.

Heavy regulatory burdens and a hostile business tax climate also figured into the equation. The Mercatus Center at George Mason University ranks New Jersey forty-eighth in business tax burden and last among the fifty states in freedom from excessive regulation. California ranks forty-fifth in tax burden and last in regulatory freedom and New York ranks dead last in tax burden and forty-seventh in freedom from excessive regulations, according to the Mercatus Center.

A Tax Deduction for Moving Expenses

If you decide to pull up stakes and move from your high-tax state to a state with a lower tax burden, you’ll incur significant expenses, not the least of which being the actual move to your new location. You may be able to reduce the financial bite through federal tax deductions. To be eligible for the deduction, you must satisfy two tests: the distance test and the time test.

The distance test requires your new workplace must be located at least fifty miles further away from your old home than the distance between your old workplace and your old home. If you were unemployed before the move, your new job location must be at least fifty miles away from your old home. This test is the same whether you work for an employer or you are self-employed.

The time test requires employees to work full-time at a job for at least thirty-nine weeks during the first twelve months immediately following the move. If you are self-employed or a small business owner, you must work full-time for at least thirty-nine weeks during the first twelve months after your move and a total of seventy-eight weeks during the first twenty-four months after your move.

To take the deduction, you will need to complete Form 3903 (Moving Expenses) and submit it with Form 1040. Your moving expenses will count as an adjustment to your income. Publication 521, Moving Expenses, distinguishes deductible from nondeductible expenses and provides instructions on how to properly complete Form 3903 so that you can claim the greatest amount of legitimate deductions.

If you live in a state with high taxes and heavy regulation for businesses and you’re ready to make a move, it’s clear that you’re in good company. If you are financially and personally able to move to a cheaper state, and doing so will improve your circumstances, few people would blame you for getting out of dodge. Just be smart about making your move. Besides scouting out job opportunities and neighborhoods, let Uncle Sam ease the financial burden of your relocation if possible.

Photo: Great Beyond