Aside from the weather, beautiful scenery and an abundance of recreational opportunities, taxes are almost certain to figure prominently in the selection criteria for any retiree thinking about relocation. Picking a tax-friendly state is a smart strategy which can help you stretch your retirement dollars a lot further and make the most out of your golden years. There are many types of taxes that retirees should evaluate in accordance to the specifics of their personal and financial situation when choosing their “ideal” retirement location:
• Alcohol Tax
• Cigarette Tax
• Diesel Fuel /Gasoline Tax (Cities and counties in some states can also charge local sales and gasoline taxes)
• Estate Tax
• Inheritance Tax
• Income Tax
• Interest Income (Tax status of interest earned on government bonds; federal, state or local)
• Property Tax
• Retirement Income Tax Status (Any special exemptions for pensions or minimum distributions)
• Sales Tax
• Social Security Tax
For every tax “advantage” there is a concurrent disadvantage. Not understanding the interplay of various taxes and their cumulative affect on their income is a pivotal mistake of many retirees. Further adding to the complexity is that state laws and rates vary tremendously. Some retirees may be attracted to a state which does not tax income but overlook how the higher excise taxes, property taxes and sales tax can work to diminish their income over time, factors which are likely to damper their initial enthusiasm and expectations. Another mistake is to pick a state that is cheap to live in but expensive in which to die from the perspective of estate and inheritance taxes. Of course, this is not a concern if you do not have beneficiaries or a high net worth estate. Some states that do impose an inheritance tax are Indiana, Iowa, Kentucky, Nebraska, Pennsylvania and Tennessee. Property taxes are inherently difficult to evaluate as they differ in terms of the state and the specific locality (e.g., borough, city, county or municipality). Moving to an area for “cheaper housing and acreage” without adequately researching the property taxes can prove to be a costly mistake. Although many states do tax-exempt prescription drugs, a tax can still be imposed on over-the-counter medication. Sales taxes can work to reduce your income. It is necessary to add your city and state sales taxes to determine how much your income is being reduced as a result of tax obligations.
Seniors, due to their income, are a highly sought-after group. There is tremendous competition among states to entice senior relocation through a variety of special perks and incentives. Some states have a myriad of tax-exemption “perks” for seniors who purchase retirement property. If you are interested in a particular state, it is well worth investigating additional tax-advantaged savings that are available to senior residents.
Here is a quick guide which illustrates the differences in state tax laws and can be utilized as a starting gauge for further research (information current at time of publication, 4/2011).
States Without A Sales Tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
States That Do Not Tax Social Security: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Virginia, Wisconsin and Wyoming. The District Of Columbia does not tax Social Security. Some states tax a portion of Social Security depending on the adjusted gross income or age of the taxpayer.
States Without Income Tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax dividends and interest income (check the income limits).
States With Highest Sales Tax: California (8.25%), Indiana (7%), Rhode Island (7%), and Tennessee (7%).
States With Lower Sales Tax: Hawaii, Maine, Virginia, Wisconsin and Wyoming.
States That Are Pension-Friendly: Alabama, Alaska, Florida, Georgia, Kansas, Michigan, Louisiana, Massachusetts, Mississippi, Nevada, New Hampshire, New York, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
States With Highest Income Tax Rates: California, Hawaii, Iowa, Maine, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont as well as The District Of Columbia.
As one can quickly surmise, there truly is no “perfect” tax-friendly retirement locale. Finding your ideal “spot” hinges on a thorough assessment of your personality, health, lifestyle preferences, type of retirement income, financial objectives and estate plan. Florida, for example, exempts income tax but the heat and humidity might be too much of a turn-off for some, quickly offsetting the potential tax advantage. But then, you still have the remaining states from which to choose. If you plan to live off your investment income, then you will need a state which has more favorable tax terms for that type of income. For those individuals unable to choose a retirement location from the vantage of tax-advantaged savings, it is helpful to consult with an experienced retirement planning specialist or tax accountant.
For informational purposes and not intended as advice. Every attempt is made at accuracy, however, the author does not claim that content is free of factual errors.