Florida Snowbirds: Key Financial Planning Considerations That Are Often Missed

Florida Snowbirds: Key Financial Planning Considerations That Are Often Missed
 
(Reprinted from the February 2017 edition of the Bath Country Journal and Richfield Times.)
 
This time of year thoughts of escaping the cold for the warm Florida sunshine may be going through your mind. Coupled with the idea of no state income taxes, you begin to consider whether it makes sense from a financial perspective to change residency to Florida once you are retired and have more flexibility. The answer is sometimes yes and sometimes no, and the financial analysis done in making such a big decision often falls short. We will describe some of the considerations that often go unnoticed.
 
As of 2015, you can now live in Ohio for about seven months and avoid paying Ohio income taxes, which are as high as 5% of your annual taxable income. Ohio formerly considered someone a resident for income tax purposes if they had 183 or more “contact periods” (essentially an overnight stay) in Ohio during a year. Now an individual can have up to 212 contact periods in Ohio before they will be presumed a resident for Ohio income tax purposes, provided the individual maintain an abode outside of Ohio for the entire year.
 
Pros and Cons
 
While the obvious pro is no state income tax in Florida, other benefits may include lower county sales taxes and limits on increases for Florida real estate taxes resulting from Florida’s homestead exemption. Once the property is homestead, the assessed value for tax purposes cannot rise more than 3% in any given year. Over time, a property’s market value may increase more than its assessed value, and the homestead could save thousands yearly in lower property taxes. The larger the home’s value and the greater the appreciation, the more benefit of being a Florida resident.
 
Another often-missed benefit is for some Ohio residents who find themselves in the Alternative Minimum Tax (AMT). In our wealth management practice, we commonly see Ohio residents a few hundred dollars to upwards of $10,000 in the AMT. For many of these clients, AMT has the effect of generally increasing their federal tax rate by as much as 7% over the regular tax system. State income taxes help push a taxpayer into the AMT. Thus, being a Florida resident and having zero state income taxes could lower your Federal tax rate as well.
 
On the con side, it is easy to see the inconveniences of having to change your driver’s license and voter registration to Florida. Higher costs for property and casualty insurance, and specifically auto coverage, are also commonly known. In fact, doubling of the auto insurance premium is not uncommon.
 
Yet, one of the biggest financial cons missed is the higher cost of health insurance in Florida compared to Ohio. Based on 2014 data for the Bureau of Labor Statistics for out-of-pocket expenses and on 2015 data for average premiums by state from Weiss Ratings, LLC, health insurance costs were about 15% greater in Florida than Ohio for someone on Medicare. Cases where the initial cost increase is about $2K per year for a husband and wife combined are common. Since healthcare costs increase faster than other expenses, Florida health insurance cost increases become even greater over time and consume a greater portion of the annual state tax savings.
 
On the neutral side, there are no state income taxes imposed on Social Security benefits for Ohio residents. So the higher the percentage of retirement income you derive from Social Security, the less financial benefit you will receive by becoming a Florida resident.
 
In our wealth management practice, we have seen cases of hundreds of thousands of dollars of state tax savings by avoiding capital gains when selling a business or avoiding income tax on deferred compensation payments. Yet you must consider the other side of things. Even for a retiree with taxable retirement income in the low six figures, it is not uncommon to find that net savings are much less than expected and quite possibly zero. So before plunging into a place on the gulf coast, careful financial and tax analysis is required to ensure you are likely to make the right decision on residency and making the most of your money.
 
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent registered investment advisory and wealth management firm specializing in retirement, tax, and investment planning. This article adapted with permission from Dimensional Fund Advisors. Kevin can be reached by calling (330)777-0688 or by email at kkroskey@truewealthdesign.com.