If your retirement dream involves becoming a snowbird that heads to warmer weather in the winter, experts recommend understanding all the financial implications or the annual migration can become a nightmare.
"In addition to basic financial plans that must be laid out, estate and tax considerations also must be top of mind when retired couples or individuals are traveling back and forth to multiple homes throughout the year," says Certified Financial Planner Ron Weiner, president and CEO of RDM Financial Group.
He offers the following tips that boomers often overlook when they are considering a snowbird lifestyle:
Boomer: What are some of the top financial concerns nesting snowbirds should have, and why is it important for them to have solid plans in place?
Weiner: They should have a good understanding of the costs of maintaining both residences. Developing a comprehensive plan will ensure that they look at all the costs of having two homes and determine the most efficient way to afford them.
Those looking to buy a condo in Florida or Arizona for example, should look at vacancies and foreclosures in the complex, and try to gauge potential assessments. Some of these areas have not recovered from the recession, and what seems like a good deal can turn out to be more expensive than it appears. It is a good idea to rent first in an area before buying.
Boomer: What common elements tend to be overlooked by snowbirds dividing time between two states?
Weiner: Research. Have they done their research or did they just find a place and now they are trying to justify the costs and make it work? Have they taken into account all the costs associated with the two residences? Are they aware of the tax benefits that one place may offer over the other? Do they have a long-term commitment to a specific area or will they be looking for another place every few years? Are they considering renting out one of their homes? Have they really considered the costs associated with renting out a property? Do they have a realistic "business" plan?
In evaluating where to have a second home, snowbirds should look at the taxing policies of the states they are considering and their sources of income. Some states do not have income taxes. Some states tax pension, annuity, and retirement income more favorable than others. Will all your funds be coming from taxable accounts or tax-deferred accounts such as traditional IRAs?
Also, some states do not tax Social Security income. Snowbirds also need to look at how their sources of income may change over time. Planning to sell a business sometime in the future? You may want to consider changing residency before that sale.
Another favorite expense buster is whether snowbirds considered how often the children and grandchildren come to visit now that they've moved so close to Disneyworld. Even within states, varying property taxes may alter the equation. Air fares, limos to airport, frequent entertainment of friends and family, as well as tolls, car, and gas taxes should also be considered. If you are moving to a gated community, there are extensive and numerous required expenses. Additionally, repairs and typical maintenance of a second home are to be expected.
Boomer: What is meant by state-specific guidelines and how do they affect boomer snowbirds?
Weiner: If the snowbird wants to claim residency in the more tax-friendly state, let's say Florida instead of New York, he or she must follow the guidelines to break ties with the former resident state. In this case, break up with New York and establish ties with Florida. It may take more than just being there more there 183 days. The losing state, especially New York, will look to one's intent through a laundry list of items such as, where are doctors, where do you pray, and where do you bank. They will look to see where you keep those things that are "near and dear" to you.
In New York, for example, Social Security and government pension benefits are not taxed, plus each person can exclude up to $20,000 annually of additional pension or retirement income, including IRA distributions, if over 59 1/2. For retirees who have most of their income in these categories, the tax benefits of changing their state of residency may not be as much as they expect.
Boomer: What affect does part-time residency have on income tax returns -- if any?
Weiner: Part of your plan and cost justification in having two homes may dictate changing your residency for the tax benefits. Also if you plan to rent out one of your two properties, you or your accountant may have to become familiar Schedule E. Income sourced in a particular state, such as renting out a property there, or income from a business there may still be subject to taxes in that state, even if residency has changed to another state.