Should I Retire Outside Wisconsin

By Bob Moeller
WEAC Member Benefits

November 2002

Financial Planning Seminars
Achieving Financial Independence

Updated February 22, 2006

When counseling members about retirement, I hear comments about moving to states with very low taxes. The purpose of this article is to give some guidance on that topic.

First, regarding taxes, I am quoting from the official Wisconsin Department of Revenue “Tax Information for Part-Year Residents and Non-residents of Wisconsin for 2001” guide. You can order it from the Department of Revenue or print it off the Internet.

“Full-year resident … is an individual who is domiciled in Wisconsin for the entire taxable year.”

“Part-year resident … is an individual who is domiciled in Wisconsin for part of the taxable year.”

Domicile … is your true, fixed, and permanent home where you intend to remain permanently and indefinitely and to which, whenever absent, you intend to return. It is often referred to as “legal residence.” You can be physically present or residing in one state but maintain a domicile in another. You can have only one domicile at any time.

Your domicile, once established, is never changed unless all three of the following occur or exist … “You specifically intend to abandon your old domicile and take actions consistent with intent and you intend to acquire a new domicile and take actions consistent with such intent … and … you are physically present in the new domicile.”

Notice there is no six-month and one-day rule. Essentially, what this says is that if you buy or rent living quarters in another state, take actions to establish domicile such as a driver’s license, auto license, filing taxes in the other state, etc., you will be considered domiciled in that state. If you still maintain a second home in Wisconsin and visit it regularly, but with no intent to change domiciles, you will not be considered domiciled in Wisconsin, and not a resident of Wisconsin for income tax purposes. Under those circumstances, you must file an income tax return in Wisconsin only if you have Wisconsin earned income (salary) or rental income from Wisconsin properties. Does that mean that you can rent an apartment year-round in Florida, change your driver’s license, auto registration, voting registration, etc., to Florida and spend seven months per year in your second home in Wisconsin drawing a Wisconsin pension and pay no Wisconsin income taxes? Yes. But, read the definitions above carefully and make sure you fall within them. Also make sure that the state you are considering will consider you a resident under those circumstances. Usually you will have no problems.

Which state? The three most popular states with a southerly climate and no state income taxes are Florida, Texas, and Nevada. There are other states that have no income taxes including Washington and Wyoming.

Further, several states have breaks on what constitutes taxable income for retirees, and frequently these breaks end up resulting in no income taxes. But, that doesn’t mean the states have no other taxes. For a good discussion of the various tax situations in different states, I suggest you go to the library and look at Kiplinger’s magazine, July 02, 2002, issue, page 72. Remember, tax laws change all the time, so make sure your information is current.

It is important to note that there are many ways to analyze how states compare in terms of overall taxes, and some believe Wisconsin's tax burden is now considered to be pretty average. For example, according to data from the Wisconsin Department of Revenue, state and local taxes in Wisconsin relative to state personal income were considerably lower in 2006 than they were 10 years earlier, according to a 2006 research paper by University of Wisconsin-Madison applied economics Professor Andrew Reschovsky. He reported that Wisconsin ranked 23rd from the top, only a few tenth of a percentage point above the national average in terms of state and local general revenue relative to state personal income. ("The Taxpayer Protection Amendment: A Preliminary Analysis," by Professor Andrew Reschovsky.)

According to 2002 data, the “retirement” states with the lowest taxes were Texas, Florida, Arizona and California.

Are services that much worse in the low tax states? There will be some differences, but some states have other income to replace personal taxes. Wyoming, for example, gets huge amounts from the oil industry. However, be aware that fees may be a lot higher in lower tax states, including car registration, garbage pickup, etc.

Before you abandon Wisconsin, make sure you know exactly what you are going to end up with in another state. Probably a good idea is to “try out” the state for a longer period by renting first before deciding. Finally, contact the state treasurer, local property tax experts, etc., to see exactly what your situation will be. Particularly, check on local taxes and fees. You might want to check out “America’s Best Low Tax Retirement Towns,” by Eve Adams, or similar books in the library. Remember, many people move and then decide they should not have.

Posted October 29, 2002; Updated February 22, 2006