Resettlement Investment Tax Implications

Every year, millions of people in the United States move to a new state, some to take advantage of new remote work options, others for new jobs, retirement, or family reasons. Whatever the prompt, moving can mean many changes, from new employers and trips to schools and neighbors.

But it can also raise new tax issues for your investment portfolio. And as with every item on your to-do list, you want to be prepared for any impact. First, consult your tax advisor to find out if your new state has a different rate or rules. Next, be sure to discuss these three factors with your financial advisor:

Moving to a state with lower income and capital gains taxes can mean higher after-tax returns on your investments. And even a modest difference in after-tax returns, compounded over time, can lead to significant differences for a portfolio.

For example, an investor in California would pay 60 basis points more in taxes on their returns than an investor in Texas, assuming they are both in the highest marginal tax bracket. Over a 20-year period, this seemingly small difference would see a Texas resident get $600,000 more in wealth accumulation than a California resident on a $2.5 million portfolio of 50% stocks and 50% bonds, based on current return expectations.1

Not all investments are taxed equally, so changing states can change the attractiveness of some types of assets over others. For example, the move to a low-tax state could increase the appeal of so-called bond substitutes, such as relative-value hedge funds and some real-asset strategies that are less tax-efficient but provide better hedging against rising inflation and interest rates. .

Different effective tax rates can also affect the best type of investment manager to use. For example, actively managed funds tend to buy and sell assets more frequently than passive funds, and therefore tend to be less tax efficient. A lower effective tax rate can increase the attractiveness of their potential for diversification and additional returns.

Although municipal bonds are generally exempt from federal taxes, they are also often exempt from state and local taxes if the investor lives in the state that issued the bond. This exemption has recently made such obligations more attractive to many taxpayers, as reforms passed in 2017 capped state and local tax deductibility, thereby increasing effective state and local tax rates.

If you have moved from a state from which you continue to hold bonds, you will likely be faced with a choice: keep them and potentially lose any state and local tax exemptions or sell them and possibly trigger a capital gains tax liability. The right answer for you will depend on several factors, including:

  • the after-tax return of available alternative investments
  • if you have capital losses to offset your gains
  • how changes to your allocation strategy could impact the rest of your portfolio

Also, if you were contributing to a 529 college savings account in a state that offers state tax benefits, but you move to a state that does not, be sure to assess the implications for future contribution decisions.

Obviously, a relocation can affect your investment portfolio in unexpected ways. Your Morgan Stanley financial advisor can create a personalized investment approach that will work for you throughout your move and its tax implications. No matter where you live, our suite of tax-efficient solutions, like Morgan Stanley’s Total Tax 365, can help you figure out how to potentially save on taxes throughout the year and keep more of what you you have won.

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