Save on Taxes – Moving Residences Mid Year!

Moving to a new state mid-year can impact your taxes moving forward, affecting both state and federal filings. Understanding residency rules, deductions, and strategies to avoid double taxation is key to minimizing your tax burden. Proper timing and documentation can help you maximize savings and prevent complications. This guide covers essential tax strategies, from filing part-year returns to updating financial records. With careful planning, you can ensure a smooth tax transition and avoid costly mistakes.

A tax accountant was on a call with a client, carefully reviewing his tax plan, which had been structured to save him over $50,000.

The client was thrilled with the savings as they discussed the next actionable steps. Everything seemed to be wrapped up when, just before ending the Zoom call, he casually mentioned something that changed everything.

He had moved into a new home mid-year.

His previous CPA had dismissed the topic when he initially inquired about tax implications, making him believe it wasn’t worth discussing. He nearly brushed past it again—but lucky for him, we’re not your average CPAs.

Unlike many firms, we don’t just crunch numbers and file returns. We’ve invested heavily in specialized training with top tax planning attorneys and strategists nationwide. That expertise allows us to dig deeper, ask the right questions, and—most importantly—spot opportunities others miss.

Immediately, we recognized that his mid-year move opened the door to advanced tax strategies. Certain deductions and credits can, in specific cases, be “doubled” when there’s a change in residence. However, identifying and properly leveraging these opportunities requires an expert understanding of tax law.

Most taxpayers (and even many CPAs) wouldn’t know to look for this, let alone apply it correctly. This is not a DIY tax hack!

After carefully reviewing the tax code and ensuring compliance, we uncovered a way to maximize his benefits. The result? An additional $10,000 in tax savings.

A simple conversation saved this client five figures—proving once again that tax strategy isn’t just about what you know; it’s about knowing what to ask.

Understanding State Tax Implications

When you move to a new state mid-year, your tax situation can become more complex. Some states have higher income taxes, while others have no state income tax at all, which can significantly impact how much you owe. Understanding part-year residency rules and state tax laws can help you minimize your tax burden.

How State Income Taxes Vary & Why Moving Mid-Year Affects Your Tax Liability

Each U.S. state has its own income tax laws. Some states impose progressive income tax rates, while others have flat rates or no state income tax at all.

• If you move from a high-tax state (e.g., California or New York) to a low-tax or no-tax state (e.g., Texas or Florida) mid-year, you may only owe state taxes on the income earned while residing in the high-tax state.
• The timing of your move matters—where you earned your income and when you established residency can affect how much you owe.
• Some states prorate income taxes based on how long you lived there, while others may require you to file as a full-year resident if you were there for most of the year.

Part-Year Residency Rules: How States Tax Income When You Move Mid-Year

Most states use part-year residency rules, meaning you pay income taxes based on the portion of the year you lived there. Here’s how it typically works:

• Part-Year Resident Status: You’ll file as a part-year resident in both your old and new state, reporting the income earned while living in each.
• Apportioning Income: Some states require you to apportion your income based on the exact dates you lived there, while others use formulas based on days spent in the state.
• Tax Credits for Double Taxation: If you earn income in both states, your new state may offer a credit for taxes paid to your previous state, preventing double taxation.

⚠️ Important Note: Some states (e.g., California and New York) have strict residency tests, meaning they may still consider you a tax resident if you maintain significant ties, such as owning property or working remotely for an in-state employer.

Which States Have No Income Tax?

Moving to a no-income-tax state can lead to significant tax savings, especially for high earners. The following nine states do not impose a state income tax:

1. Alaska
2. Florida
3. Nevada
4. South Dakota
5. Texas
6. Tennessee
7. Washington
8. Wyoming
9. New Hampshire (no tax on wages, but taxes investment income)

How Relocating to a No-Income-Tax State Can Save You Money

• More Take-Home Pay: Without state income taxes, you keep a larger portion of your paycheck.
• Lower Business & Investment Taxes: Entrepreneurs and investors can benefit from lower overall tax burdens in these states.
• Retirement Savings: No-income-tax states are attractive to retirees looking to preserve their Social Security and investment income.
• Property Tax & Sales Tax Considerations: While some no-income-tax states compensate with higher property or sales taxes, overall tax savings can still be substantial.

Key Takeaways

• Moving mid-year means splitting tax liability between two states.
• Part-year residency rules determine how much tax you owe in each state.
• No-income-tax states offer major financial benefits, but other factors like cost of living and property taxes should also be considered.
• Careful planning and proper documentation can help minimize tax burdens and avoid unnecessary penalties.

Deductions & Tax Breaks for Moving

Moving mid-year can impact your taxes in several ways, from potential deductions to tax exclusions when selling a home. While moving expenses are no longer deductible for most taxpayers, homeowners can still take advantage of home sale tax exclusions, mortgage interest deductions, and property tax benefits.

1. Moving Expense Deductions – Who Qualifies?

Under the Tax Cuts and Jobs Act (TCJA) of 2017, moving expenses are no longer tax-deductible for most people. However, there is an exception for active-duty military members who relocate due to a permanent change of station (PCS).

Who Qualifies?
✅ Active-duty military personnel moving due to a military order.
❌ All other taxpayers (employees, self-employed individuals, retirees, etc.) cannot deduct moving expenses.

Deductible Moving Expenses for Qualifying Military Members:

• Transportation and storage of household goods.
• Travel expenses for the move (lodging, mileage, airfare, etc.).
• Costs of moving pets or vehicles.
• Packing, crating, and shipping costs.

⚠️ Important: Military members must not have received reimbursement for these expenses to claim the deduction.

2. Home Sale Tax Exclusions – Avoiding Capital Gains Tax

If you sell your home while moving, you may owe capital gains tax on the profit. However, the IRS offers a Home Sale Tax Exclusion to help homeowners avoid or reduce these taxes.

How the Home Sale Tax Exclusion Works

• Single taxpayers can exclude up to $250,000 in capital gains from the sale of their primary residence.
• Married couples filing jointly can exclude up to $500,000 in capital gains.
• To qualify, you must meet the Ownership & Use Test:
  • You owned and lived in the home as your primary residence for at least two of the last five years before the sale.

Example:

• You bought a home for $300,000 and sell it for $600,000 after five years.
• Your gain is $300,000.
• If you’re single, you can exclude $250,000, meaning you only pay capital gains tax on $50,000.
• If you’re married, you can exclude the full $300,000 gain and pay no capital gains tax.

⚠️ Exceptions to the 2-Year Rule:
If you had to move due to job relocation, health reasons, or unforeseen circumstances, you may still qualify for a partial exclusion even if you didn’t meet the full two-year requirement.

3. Mortgage Interest & Property Tax Deductions – How Moving Mid-Year Affects Them

Mortgage Interest Deduction

If you have a mortgage, you can deduct the interest paid on up to $750,000 of mortgage debt ($1 million if the loan was taken before December 15, 2017).

How Moving Mid-Year Affects This Deduction:

• You can deduct only the mortgage interest paid while you owned the home during the tax year.
• If you sell your old home and buy a new one, you’ll split the deduction based on the number of months you paid interest for each property.

Property Tax Deduction

• Homeowners can deduct up to $10,000 ($5,000 for married filing separately) in state and local taxes (SALT), including property taxes.
• If you move mid-year, you prorate the property tax deduction based on the months you owned each home.

Timing Your Move for Maximum Savings

Best Times of the Year to Move for Tax Benefits

• Before Year-End: Moving before December 31 allows you to establish residency in your new state for the full tax year, which is beneficial if you are moving to a state with no income tax.
• After January 1: If moving to a higher-tax state, delaying your move until the new year may help you avoid paying taxes there for the previous year.
• Mid-Year Moves: Require careful tax planning since your income must be allocated between two states.

How Choosing the Right “Tax Residency Date” Impacts Taxes

• Your tax residency date is generally when you establish a permanent home in the new state.
• Some states determine residency based on where you spent most of the year, while others follow the 183-day rule (more than six months in a state makes you a full-year resident).
• Timing your move strategically can help minimize state tax liability, especially if relocating to a low-tax state.

Ways to Legally Establish Residency Before Year-End

To solidify residency in your new state and reduce tax obligations in your old one, consider the following steps:

• Obtain a new driver’s license and update vehicle registration.
• Register to vote in your new state.
• Change your mailing address for financial accounts and bills.
• Spend more time in your new state than the old one, especially in 183-day rule states.
• File your tax return using your new address.

Avoiding Double Taxation

How to Prevent Getting Taxed by Both States

• File as a Part-Year Resident: Most states allow part-year returns, so you only pay taxes on income earned while living there.
• Check for Reciprocal Agreements: Some states have tax agreements that prevent double taxation for workers who live in one state but work in another.
• Claim a Tax Credit: If both states tax the same income, you may be eligible for a credit on one of the returns.

Key Documents to Prove Residency in Your New State

• Lease or mortgage documents
• Utility bills in your name
• Employment records or pay stubs
• Updated state ID and voter registration
• A new state tax return

Proper planning and documentation can help you avoid unnecessary tax liabilities and disputes.

Final Tax Filing Tips for a Smooth Transition

How to File State and Federal Taxes Correctly After a Mid-Year Move

• File a Part-Year Resident Tax Return: Most states require part-year returns if you lived in two states during the year. You will typically pay taxes only on the income earned while residing in each state.
• Determine Residency Rules: Each state has different rules for determining residency, so check whether you qualify as a part-year or nonresident filer.
• Allocate Income Properly: Divide your income between states based on the time you spent in each location or where it was earned.

Using a Tax Professional to Optimize Deductions and Credits

• A tax expert can help ensure you maximize deductions for mortgage interest, property taxes, and moving expenses (for military personnel).
• They can also help navigate state-specific tax rules to minimize double taxation and claim any reciprocal agreements or tax credits.
• Professional guidance can prevent costly mistakes, especially if your move involved selling a home or changing your employment situation.

Double-Checking Address Updates with the IRS, Banks, and Financial Institutions

• Update your address with the IRS by filing Form 8822 to ensure tax documents reach you.
• Notify your employer of your new address to prevent errors on W-2s or 1099s.
• Update financial institutions, loan providers, and investment accounts to avoid missing important tax-related documents.

Careful tax planning and timely updates can help you avoid complications and ensure a smooth transition to your new state.