Advertisement
retirement

6 Tax Factors to Consider When Picking a Retirement Destination

It pays to know how much you might pay in state and local taxes before you move.

Maybe you're thinking about relocating in retirement, in hopes of enjoying milder weather and lower expenses. Before you make a move, it pays to assess the overall tax burden of your future home.

No matter where you live, your federal taxes will be about the same if you take the standard deduction. But you'd be amazed at how much your state and local tax burden may vary from one location to another.

Advertisement - Article continues below

People planning to retire "often use the presence or absence of a state income tax as a litmus test for a retirement destination," says Tom Wetzel, president of the Retirement Living Information Center. That's indeed one factor for retirees to consider. But Wetzel notes that "higher sales and property taxes can more than offset the lack of a state income tax."

Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no state income tax. Two states -- New Hampshire and Tennessee -- tax only dividend and interest income that exceeds certain limits. But many of the remaining 41 states (and the District of Columbia) that impose an income tax offer generous incentives for retirees. If you qualify for the breaks, moving to one of these retiree-friendly areas could still be a good deal -- taxwise -- for you.

Advertisement
Advertisement - Article continues below

Here are five other key tax factors to consider when comparing states as possible retirement destinations:

Taxes on retirement-plan distributions

Although most states that impose an income tax exempt at least a portion of pension income from taxation, they often treat public and private pensions differently. For instance, some states exclude all federal, military and in-state government pensions from taxation. Other states go even further, exempting all retirement income -- including distributions from IRAs and 401(k) plans.

Advertisement - Article continues below

Some states that tax pension income offer special breaks based on age or income. At the other end of the spectrum, several states are particularly tough on retirees, fully taxing most pensions and other retirement income.

Taxes on Social Security benefits

Depending on your income, you may be required to include up to 85% of your Social Security benefits in your taxable income when filing your federal return. (Read Strategies to Reduce Taxes on Social Security and Plan to Pay Taxes on Social Security to learn more about how benefits are taxed.) But in recent years, many states have been moving away from taxing Social Security benefits. Thirteen states now tax Social Security benefits to some extent.

Sales taxes

Don't forget to include state and local sales taxes in your personal budget analysis. Some states exempt food and medicine; other states famously have no sales tax at all, while some will tax every dime you spend.

And keep in mind that the sales-tax pain doesn't always stop at the state level. Most states allow cities and counties to assess their own sales taxes.

Property taxes

Property taxes are a major cost factor, particularly for retirees living on a fixed income. The median property tax paid in the U.S. on the median U.S. home value of $164,200 is $1,809, according to the Tax Foundation.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

Tax rates vary significantly from state to state and among cities in the same state. But many local jurisdictions offer property tax breaks to full-time residents, some based on age alone and others linked to income.

Check to see how the local jurisdiction generates property-tax bills. There are two key numbers to evaluate: the percentage of a home's assessed value that is subject to tax and the property tax rate. Note that, depending on the tax rate, a home taxed at 100% of its assessed value could have a lower tax bill than a property that is taxed at only 50% of its assessed value. For example, on a $100,000 property taxed at 100% of its assessed value with a 2% tax rate, the property-tax bill would be $2,000. If instead the property is taxed at 50% of its assessed value with a 5% tax rate, the tax bill would be $2,500.

Estate and inheritance taxes

In addition to the federal estate tax (only relevant to estates valued at $5.43 million or more in 2015), some states levy their own estate tax. Many of these taxes kick in at levels lower than the federal threshold. Wealthy retirees need to make sure their estate plans take into account both federal and state estate taxes, which can eat into the amount passed on to heirs.

In a handful of states, heirs have to pony up. States that levy an inheritance tax require heirs to pay taxes on inherited assets.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for paying estimated taxes, IRA or HSA contributions, and other deadlines, there's more to do by July 15 than just filing your feder…
July 14, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Tax Day 2020: When's the Last Day to File Taxes?
tax deadline

Tax Day 2020: When's the Last Day to File Taxes?

Thanks to the coronavirus pandemic, the 2020 tax deadline was pushed back to give taxpayers (and tax preparers) more time to file returns.
July 14, 2020

Recommended

Tax Tips for Last-Minute Filing
tax deadline

Tax Tips for Last-Minute Filing

As you scramble to beat the July 15 tax return filing deadline, here are some pointers to bring your stress level down.
July 14, 2020
When Are 2020 Estimated Tax Payments Due?
tax deadline

When Are 2020 Estimated Tax Payments Due?

If you're self-employed or don't have taxes withheld from other sources of taxable income, it's up to you to periodically pay the IRS by making estima…
July 14, 2020
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
July 9, 2020
8 Ways You Might Be Cheating on Your Taxes
taxes

8 Ways You Might Be Cheating on Your Taxes

Don't fall into these common traps that can get you in hot water with the IRS.
July 8, 2020