PODCAST: Taxes on Retirees — What’s New

In this episode of Your Money's Worth, senior tax editor Rocky Mengle talks about the latest update of the Kiplinger Retiree Tax Map. Will states with declining revenues make life harder on retirees? Also, the Biden stimulus plan and the hazards of patent scams.

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David Muhlbaum: Retirement, for many, it's a moving target. Not just the question of when to take it, but where to take it. For years, the Kiplinger retiree tax map has been a resource for people trying to judge which states will take the smallest bite of their income in retirement. Rocky Mengle, Kiplinger senior tax editor, joins us to talk about what's new with the map this year. Also, President-elect Biden has big stimulus plans and have you invented the better mouse trap while stuck at home? Be careful if you play the patent game. That's all coming up on this episode of Your Money's Worth.

David Muhlbaum: Welcome to Your Money's Worth. I'm kiplinger.com senior editor David Muhlbaum. I'm joined by senior editor Sandy Block. Sandy, how are you doing?

Sandy Block: Doing great.

David Muhlbaum: Our guest today for the main segment is kiplinger.com's senior tax editor Rocky Mengle. But he's also been tracking every jot and tittle of the stimulus drama that's been playing out in Washington over the past month. So we've dragged him in a little bit early to talk about that as well. Welcome, Rocky, and thanks.

Rocky Mengle: Oh, you're welcome. I'm pretty busy lately.

David Muhlbaum: Yeah. And before Sandy asked the question, which I know she's itching to do, I want to get through a definitional thing. That is what we're even talking about when we say stimulus now. Last year, we had the CARES Act and other big measures in the spring when COVID first broke out. And then at the very end of the year, we have the will they won't they drama of the second stimulus, the one that generated the current round of $600 checks.

And now we have President-elect Biden's American Rescue Plan, which is going to end up being shorthanded as the Biden stimulus. But that's in part because at this point, it's just a proposal. Now by making these proposals, he's taking a more active role than his predecessor in saying do this, not that. But Congress, I mean, they still have to come along.

Sandy Block: Yeah, they do. And I know Rocky will give us some of the other political handicapping, but let's start out with the checks because if there's one thing we know, people care about the checks. Specifically, how big will the checks be? And when will we get them?

Rocky Mengle: The checks, under the Biden plan, are going to be an extra $1,400. Now I know everybody's heard $2,000 checks, that amount being thrown around, but don't hold your breath on $2,000. And the extra $1,400 is really kind of just adding on to the $600 check to get to $2,000. So third-round checks, $1,400.

When? It's a little bit difficult to say. The way the Biden plan seems to be coming together right now, the checks would be part of a big package, $1.9 trillion package. And it's going to take a little bit longer to get a big package like that through Congress than if they had split that out into a standalone bill and just for stimulus checks and tried to pass that all by itself. So my best guess, checks might start rolling in March, I think. Early March, mid-March. That's at the earliest.

David Muhlbaum: I also understand this plan would be a little bit more generous with a dependent children. And as a point of reference, I have a 16-year-old. She going to be worth a little bit more now?

Rocky Mengle: Yeah, could be. Yeah. Under the previous rounds of stimulus checks, children 16 years of age and younger, the parents would get $500 for the first round checks, or $600 per child for the second round checks. Under the Biden plan, all dependents, regardless of their age, would qualify for that additional probably $1,400 amount. So that's children over 16 years of age, as long as you're still a dependent. That's college students, age 23 or younger. Older children, who are disabled dependents. And even if you have your elderly parents living with you, you're an adult, then your parents would qualify for that extra amount that you would get as well.

Sandy Block: But yeah, David, as far as the dependents go, you get the money, not her, right?

David Muhlbaum: Yeah. Okay. Do you hear that, Lily? No, really. She listens sometimes, when her mother makes her. Lily, it's going to help pay for the headlamp.

Sandy Block: Okay. So that's the checks, but as they used to say on the ads, there's more. Right, Rocky?

Rocky Mengle: Oh yeah, a lot more. Like I said, this is part of a big plan, $1.9 trillion. There's extended and enhanced unemployment benefits, extra $400 per week under the Biden plan. There's a $15 minimum wage. There's a higher childcare tax credits and child tax credits, expanded and increased earned income tax credits. So there's a whole bunch to this.

David Muhlbaum: In fact, I want to get your headline in here, Rocky, after you did all the work. 12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket. But I note the use of the conditional verbs there and we did talk a little bit about when the checks might come out and why that would be what it is and Congress is involved in that sort of thing. So give us a sense of the political landscape Joe Biden will face trying to pass this laundry list.

Rocky Mengle: Well, of course, the Senate will be controlled by the Democrats, but only because Vice President Harris will be able to cast the tie-breaking vote. There was a slim margin for the Democrats in the house. So there can be some difficulty getting this through. The Republicans can certainly slow things down. And with a large bill like this that's being presented, they need 60 votes in the Senate to pass. So they need some Republican help. If they don't get that, then they can go to a legislative process called reconciliation and pass with just a simple majority. But that'll take more time.

Some of the things that are in the bill right now, such as minimum wage increase, don't qualify for reconciliation. So they'd have to kind of strip it down a little bit or change things around. So, it might be tough getting this through, even though Congress and the executive branch will be controlled by Democrats.

David Muhlbaum: So basically everyone's got a lot more work ahead, including you, Rocky.

Rocky Mengle: Sure. Yep.

Sandy Block: That's right.

David Muhlbaum: All right. Thank you for joining us on this. And we'll be back with Rocky to talk about his showcase feature, the Kiplinger retiree tax map.

David Muhlbaum: We're back with our main segment on the Kiplinger retiree tax map. Joined by kiplinger.com senior editor, Rocky Mengle. Thanks again, Rocky.

Rocky Mengle: Oh, you're welcome.

David Muhlbaum: So the retiree tax map has been around for a while, 10 years or so. All three of the amigos talking here today, including Sandy ...

Sandy Block: ... oh, yeah.

David Muhlbaum: ...have had a part in writing, editing, or managing it. And since we're blessed with some loyal listeners here on Your Money's Worth, thank you. I'm guessing more than a few people here know what it is or have even used it. For them, we want to get into what's new this year and how Rocky's working to keep the content fresh and relevant. But dear loyal listeners, please bear with us for a minute while we do a quick catch-up for those just joining us. Rocky, what is the Kiplinger retiree tax map?

Rocky Mengle: Well, it's a tool that people can use to compare the kind of overall state and local tax burden in one state versus another. And this one is aimed at retirees so we kind of factor in all the special tax breaks that seniors get from state to state. And you can go in, you can get a whole bunch of information about the tax landscape and any state you want. And then you can also pick up to five states and do a side-by-side comparison of some of the most important tax aspects for retires in those different states.

David Muhlbaum: And maybe Sandy or Rocky, can you talk a little bit about this past year, the pandemic, or what are some of the variables that have changed retirement planning within the past year and how the retiree tax map speaks to those?

Sandy Block: I think I can jump in on that. Obviously, the pandemic and the economic downturn has been tough on a lot of people. And I think retirees, maybe thinking even more, particularly, some people were forced to retire early, earlier than planned. And in that case, they may be seriously thinking about retiring to a less expensive part of the country, downsizing, which is something that retirees are interested in all the time but I think now, it's particularly relevant.

And what this tax map can do is help you make sure that you take into account state and local taxes when you're figuring out the cost of living where you live now versus the cost of living where you might move.

David Muhlbaum: Great. Thanks, Sandy. And Rocky, to the tax map itself, what's new this year or what have you been seeing and finding in your research that's freshening the tax map?

Rocky Mengle: Well, one thing we did this year that's different is we based it on the outcomes of two hypothetical retired couples, instead of just one. And the reason why we did this is many of the tax breaks for retirees, income and property tax breaks, aren't available or are limited if your income is above a certain amount.

And in previous versions of the retiree tax map, the single hypothetical couple kind of had a higher income and so a lot of those tax breaks really weren't being reflected in the rankings. So with two couples, one with a combined income of $50,000 and the other with a combined income of a $100,000 dollars, we're able to capture these income based tax breaks much better and then we kind of average out the two results.

The results, again, is kind of a little bit of a mix up from last year to this year, in terms of which states show up on the list of the 10 most tax-friendly states. And so there's four new states added to that list and a little reshuffling of the order of the ones that stay on that.

David Muhlbaum: Okay, the four new states. What are they, and which list?

Rocky Mengle: They're on the list of the 10 most tax-friendly states. So these are the low-tax states. Added to the list this year were Hawaii, Washington, D.C. We're considering that a state. Colorado and Arkansas. And they bumped Alabama, Mississippi, Florida, and Georgia. And then on the worst state list, the 10 states that are the least tax-friendly for retirees, there was less turnover. Iowa and Texas were added to the list and Minnesota and Rhode Island were dropped from the list.

Sandy Block: Rocky, I think a lot of people would be very surprised to see Texas on that list because Texas has no state income tax. So what makes Texas so unfriendly for retirees?

Rocky Mengle: High property taxes. And in fact, the property taxes is really kind of the driving force behind the rankings for the retiree tax map, as opposed to we also have a tax map for middle-class families, and that's really driven, the rankings there are really driven by the income tax. But here's, it's the property taxes. If you have high property taxes, you're going to be on the least friendly list.

In fact, out of the 10 states on our list of the least tax friendly states for retirees, eight of those states also are in these kind of separate list of states with the highest property tax rates. And then for the list of the most tax friendly states, the top seven states all are very low property tax states. In the top 10 on that list too. So that gives you a little bit of an indication how property taxes are really kind of driving the rankings.

David Muhlbaum: And when you say property taxes, in this case, we're talking about the property tax levy on our sample retirees, and therefore it reflects rebates or credits that each individual state will offer to seniors or retirees.

Rocky Mengle: Well, since the property tax rate from one town or county to another is going to differ. We have to use kind of statewide property tax rates. So, and the property tax breaks for seniors and for other people, they're kind of baked into those figures. So yes, they affect the rates, the median property tax rate that we use, but they're not really split out and we're not applying those separately.

David Muhlbaum: But in the map, we do have the resource where people can see what they are?

Rocky Mengle: Yes. Exactly.

David Muhlbaum: Per state?

Rocky Mengle: Or you can go in state-by-state and look to see exactly what those statewide property tax breaks are. Sure.

David Muhlbaum: Okay. To stick with this one a little bit, and Sandy, I know you got a question, but to stick with this one a little bit, and to get a little bit over ourselves here, into the world of forecasting, but do we think that the ... Is it possible that the state, basically the revenue crises that many states are having as a result of the pandemic, could lead to the reduction in breaks for seniors?

Rocky Mengle: Sure. It absolutely could. States are suffering. Their revenues are down. There's two basic ways to fix that, either cut services or increase taxes. So yeah, we could see some tax increases for seniors now. Historically, over the last 10, 12, 15 years, we're seeing taxes for retirees go down. So they'd have to kind of reverse that trend. And I think states would probably go after other groups for increase in taxes, but it's certainly not out of the question.

Sandy Block: Yeah. And I think, just not so much a question as a comment. One of the things I think the tax map really illustrates for seniors is don't get too hung up on a state's tax rates because so many states exclude a significant amount of retirement income from their state income taxes. So even if they have a rate that looks pretty high, you may not have to pay it or you may not have to pay it on a large amount of your withdrawals from your IRAs, your Social Security benefits, your pension. A lot of states do exclude a lot of that money. So in that case, the rate isn't as relevant.

Whereas property taxes, while there are certainly some credits and people should take advantage of them. I think they kind of hit harder. And it's really interesting to me how our tax map sort of illustrates that that really is where a lot of seniors pay the highest amount of taxes in many states.

Rocky Mengle: Yeah. And I can give you an example of how the type of income that you have really makes a difference in terms of income taxes. And this kind of explains why income taxes aren't the driving force in our rankings.

Look at two neighboring states, Florida and Georgia. Florida, of course, is a no-income-tax state. But Georgia, they don't tax Social Security benefits at all. And they have a very generous exclusion for retirement income, up to $65,000 of your retirement income is non taxable. And that includes income from pension and IRA, capital gains, even $4,000 worth of wages.

So, for example, someone in Georgia with say $25,000 of Social Security benefits and $50,000 from some kind of other exempt retirement income. $75,000 in total income. They would not pay any income tax, just like a Florida resident. So in this case, Florida loses the advantages it otherwise has as a no-income-tax state.

David Muhlbaum: That $4,000 of earned income, did I hear that right? So you could be working at the Cinnabon on the side?

Rocky Mengle: Yeah. In Georgia.

Sandy Block: That's not how I plan to spend my retirement, David, but you be you. No, I think, like I said, I think this is, and one other thing that I think, well, this to me speaks up the value of the tax map, because you can do a comparison like Rocky just did. We have a tool that lets you compare states. And the other thing, it does let you drill down and see what really matters to you. Because states have to pay the bills. And so a state like Tennessee, which actually is one of our most friendly states, which has no income tax and fairly low property taxes, but their average state and local sales tax is 9.55%, which is a lot. Now, if you don't plan to buy much when you retire, maybe that won't matter to you, but that is something that people need to be aware of. States do have to pay the bills and they will pay them some way or the other. And a lot of states, as Texas illustrates with no income tax, make it up somewhere else.

David Muhlbaum: Yes. And there's not a single state that has a sales tax exemption for seniors. So, that's not something you can ... That's not a part of the system you can game.

Sandy Block: No. Many states do exempt what they view as essentials. Groceries, prescription drugs, things like that but that's kind of all over the place too. And it's interesting to see.

David Muhlbaum: Right. We all got to eat.

Sandy Block: Yeah. That's right.

Rocky Mengle: Yeah. And that's included in tax map as well. You can look up which states tax groceries and some other common items as well.

David Muhlbaum: Rocky, one thing I want to get to is that I just anticipate someone going, "Hawaii?" And can you explain one a little bit more?

Sandy Block: Because we're going to get mail.

David Muhlbaum: Yeah.

Rocky Mengle: Yeah. Okay.

David Muhlbaum: So just to refresh, Hawaii is one of our 10 most tax-friendly states for retires.

Rocky Mengle: Yeah. It's number two. It's number two on the list. Again, property tax. They have the lowest median property tax rate in the country. They also have the seventh lowest combined state and local sales tax rate at 4.44%.

David Muhlbaum: Yeah. But they charge it on everything.

Rocky Mengle: Yeah. They charge it on everything, but it's low. And in the cost of living is high and we don't really factor that in so much. We're just looking at the taxes. And so property tax, the rate, the statewide median rate is low, but property values are high. So your tax bill could be high, but it's not because of the rate. It's because the home values are high.

And then in their property tax, I mean, I'm sorry, their income taxes. They were above average in our calculations, but there's no tax on Social Security benefits and they have a pretty progressive tax rate system. I think there were 12 brackets ranging from as low as 1.4% and all the way up to 11%, which is very high. But again, most people aren't going to be paying that 11% rate.

David Muhlbaum: And there's no tax on the views.

Rocky Mengle: Not yet. Maybe they'll get it to that.

Sandy Block: We do need to monitor what states will be doing, going forward, because they are under a lot of revenue pressure. I agree with Rocky that states have, they want seniors. They want the seniors that are there to stay and they would like to attract more seniors. So I kind of agree with Rocky that, to the extent that there will be tax increases, it will probably be on other populations. But I also think people need to pay close attention to this because I've just been reading about Wyoming.

One of the reasons Wyoming's been able to keep their rates so low is because they make a lot of money on natural resources and that money is going away. So they're going to have to find it somewhere. So I do think, watch this space. I do think we're going to see some changes going forward.

David Muhlbaum: Yeah. Wyoming seems to be on the cusp of tearing itself apart over taxes.

Sandy Block: Yeah. Yeah. Yeah.

David Muhlbaum: Thank you again for joining us, Rocky.

Rocky Mengle: You're welcome. Anytime.

David Muhlbaum: Inventing stuff is a pretty basic human trait, whether to solve a problem or make a profit. American ingenuity, all that. I think a lot of people know someone who got a patent, maybe even firsthand, one degree of separation. You got one, Sandy?

Sandy Block: No. I just know a lot of people in my family and friends have speculated that they have some great invention that if they just got a patent for it and somebody to market it, they'd be fabulously rich and never have to work again.

David Muhlbaum: Oh, okay. Well, one thing to warn them of, because one thing that's about as popular as getting a patent is these patent promotion scams.

Sandy Block: Okay.

David Muhlbaum: And this came up on my radar because of a column that we ran in the Building Wealth channel here at Kiplinger. We have a frequent contributor there with a wonderful name H. Dennis Beaver.

Sandy Block: Love it.

David Muhlbaum: He's a lawyer and he's a darn funny writer too. Those don't always go together. And he recently put out a piece called, Got an Invention? Don't Fall for These Patent Scams.

Sandy Block: Well, all right. Isn't one of the first rules of inventing not to tell anybody about your invention because it might get stolen from you?

David Muhlbaum: Yeah, I mean, keeping it quiet is a key strategy, but the scams he's talking about, they don't really involve outright stealing of the ideas. For one thing, I don't know if that would make much of a business model, even a criminal business model, because the bulk of patents, frankly, don't pan out.

Sandy Block: Oh. Okay.

David Muhlbaum: Yeah. I mean, it's not all good. What the scammers do is more of a confidence game. They claim to help you navigate the patent system and get your product to market by paying them progressively larger amounts of money, maybe $500, $700 to start.

Sandy Block: So it doesn't matter if I have the better mouse trap or not?

David Muhlbaum: No. Frankly, your product's pretty much irrelevant. I mean, it wouldn't matter if your mouse trap killed mice through prolonged exposure to basic cable. Once your first payment clears, they're going to tell you it is great stuff. This is going to go places. It's going to be huge.

Sandy Block: Huge.

David Muhlbaum: Huge. You just sign up for the representation agreement and they'll take your gadget to trade fairs and make lots of money for you and all this requires is signing our agreement and $10,000 or so.

Sandy Block: And I'm guessing that this agreement is pretty vague.

David Muhlbaum: Yeah. I mean, in plenty of cases, it's just flat fraudulent. There's just a lot of case law on that. But the other hitch is the agreement probably does have some pretty specific language about venue.

Sandy Block: Oh.

David Muhlbaum: Venue, meaning where you can sue. Lawsuits. So what you're agreeing is to resolve legal disputes with the promoters in Florida or wherever they choose, which is going to be a huge problem if you're in Indiana and trying to get this firm to answer your calls or emails. If you're already five figures in debt to them, trying to find a lawyer to represent you at a state and prevail. No.

Sandy Block: All right. So I'll consider myself warned, should I end up inventing the next, I don't know, corn husker, when my mind wanders on a long drive through cornfields. But what should someone do if they think they have a really good idea? Because I think a lot of people do.

David Muhlbaum: Yeah. Well, the main theme is be really careful. The U.S. Patent and Trademark Office, which is of course where these ultimately go, as well as the Federal Trade Commission, they've got tons of resources online about avoiding scams. So look those up and I will put in some links. And fundamentally, people should use their own personal circles of trust. You don't have to give away your idea to do reputation research. And there are patent lawyers who are on the up and up. I know some. And if your income is on the low side, there's even a pro bono system that will give you some legal assistance for free. I'll pop a few links to this stuff in the show notes, in addition to Beaver's article.

Sandy Block: Okay. So I'm going to patent a business process to avoid patent scams. Okay?

David Muhlbaum: Oh, well, there you go. That's perfect. So Sandy, how's it going to work? Just kidding. Thank you very much.

David Muhlbaum: And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’re already subscribed, thanks. I hope you’ve added a rating or review as well. To see the links we’ve mentioned on our show, along with more great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

Sandra Block
Senior Editor, Kiplinger's Personal Finance

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.