Advertisement
Tax Breaks

States Lower Taxes to Court Retirees

The tax breaks range from property tax exemptions to tax-free retirement plan withdrawals.

Maryland is known as the Free State, reflecting its tradition of political freedom and religious tolerance, along with its resistance to Prohibition. Talk to retirees, though, and they’ll tell you the nickname is a misnomer, at least as far as taxes are concerned. While Maryland excludes from taxes up to $31,100 in income from pensions and 401(k) plans, state and local taxes on other types of income—including distributions from IRAs—can run as high as 9%.

Fortunately for Marylanders willing to relocate, a number of other states give retirees a break. For example, nearby Delaware and Virginia are both friendlier to tax-conscious seniors, according to Kiplinger’s state-by-state guide to taxes on retirees. Alternatively, Marylanders can join the thousands of retirees that have stowed their snow shovels and moved to Florida, which has no income tax and is on Kiplinger’s list of most-tax-friendly states.

Advertisement - Article continues below

Maryland Governor Larry Hogan says high tax rates are driving out lifelong Marylanders who still have much to offer the state besides a steady stream of tax revenue. Hogan, a Republican, has introduced legislation that would eliminate state taxes on the first $50,000 of income for retirees making up to $100,000 in federally adjusted gross income. Retirees with income of $50,000 or less would pay no state tax. Hogan also wants to exempt from tax all pension and retirement income paid to veterans and first responders. The tax cuts, which would cost an estimated $1 billion, would be phased in over five years, beginning in fiscal year 2022.

Advertisement
Advertisement - Article continues below

The legislation faces an uncertain future in the state’s Democratic-controlled general assembly, where lawmakers have raised concerns about how the state would make up the revenue from the tax reductions.

Other states are also looking at ways to keep retirees from decamping to lower-tax states. Illinois Governor J.B. Pritzker recently signed legislation that will make it easier for seniors in Cook County—which includes Chicago and is the state’s most populous jurisdiction—to apply for a property tax break of up to $8,000 a year. Kiplinger has designated Illinois as one of the least tax-friendly states for retirees, primarily because of its sky-high property taxes. West Virginia, which gets a “mixed” rating from Kiplinger for the way it taxes retirees, is phasing out taxes on Social Security benefits over three years, starting in 2020. In New Mexico, which also gets a “mixed” rating, lawmakers are considering several bills that would repeal or reduce taxes on Social Security.

The Gray Migration

States where the most retirees are moving, based on the number of people age 60 and older who moved into a state versus the number of people who moved out.

StateNet Migration
Florida68,918
Arizona31,201
South Carolina12,001
North Carolina9,209
Nevada8,582
Tennessee8,259
Texas8,296
Washington3,964
Idaho2,966
Delaware2,605

Source: Smart Asset analysis of 2017 census data

Advertisement - Article continues below

Even states that already have low taxes are looking at ways to become more appealing to retirees. For example, Arizona Governor Doug Ducey’s proposed budget for 2020 would eliminate state income taxes on military pensions. Arizona is one of Kiplinger’s most tax-friendly states for retirees.

Economic benefit or burden? The independent research organization Think New Mexico contends that eliminating or reducing taxes on Social Security benefits would give retirees more money to spend, which would boost New Mexico’s economy. Think New Mexico estimates that every dollar of Social Security income generates about $1.71 in spending on food, clothing, transportation and health care.

Advertisement
Advertisement - Article continues below

But reducing taxes on retirees could force states to make costly trade-offs, some tax analysts say. States with a large number of retirees could see a significant reduction in their tax base, forcing them to cut services or raise taxes on their younger residents, says Kim Rueben, Sol Price fellow at the Tax Policy Center.

Advertisement - Article continues below

“There are good reasons to want people who have spent their lives living and working in the state to stay there,” says Jared Walczak, director of state tax policy for the Tax Foundation. But “as much as it’s great to know that you’re a state that retirees want to live in, it imposes a significant cost on the rest of the population.”

It’s also unclear how much state taxes influence retirees’ decisions when it comes to choosing a retirement destination. Proximity to family, the quality of health care and the cost of housing also play roles. “People make decisions about where they’re going to live for a whole host of reasons, and taxes are not the major one,” Reuben says.

Whether you’re planning to stay put when you retire or move somewhere else, it’s important to include the cost of federal and state taxes when estimating your retirement budget. State taxes are all over the map: Some states exempt a significant amount of income from retirement plans and pensions, while others provide few breaks for retirees. Property taxes, sales taxes and gas taxes can also take a bite out of your budget. Some states also have estate and/or inheritance taxes, which could reduce the amount of money you leave to your children.

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 IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 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
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020

Recommended

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 IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 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
2020 Tax Deadline: When Are Tax Returns Due This Year?
tax deadline

2020 Tax Deadline: When Are Tax Returns Due This Year?

The April 15 deadline for filing your 2019 federal income tax return (and paying taxes) has been moved back...but the new due date is approaching fast…
July 8, 2020