A Less “Taxing” Retirement
Posted on March 1, 2014 by bob in MoneyWise
Is your primary career over, or nearly so? How would you feel about living somewhere besides the River Region? (No, I am not trying to run you off.) If so, financial considerations will probably play a role in your decision about where to settle for the rest of your life. Since taxes are a meaningful expense, taking them into account makes a lot of sense.
While federal income taxes are consistent across the country, every state raises revenue somewhat differently. Funds to operate a state typically come from a combination of income taxes, property taxes, and sales taxes. Evaluating the differences among states offers a reasonable starting point for narrowing the field.
Best Income Tax States: Seven states levy no income tax on residents—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two more—New Hampshire and Tennessee—only tax interest and dividend income.
Many states that collect an income tax exempt certain types of income for retirees. For instance, nine states exempt all income from federal, military and most if not all in-state pensions (not IRA or 401(k) withdrawals). These include Alabama, Hawaii, Illinois, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. Most states exempt Social Security benefits.
Best Sales Tax States: Five states have no statewide sales tax, although counties and municipalities within some of them may collect a sales tax. The states without a sales tax are—Alaska, Delaware, Montana, New Hampshire and Oregon.
Best Property Tax States: While all states use residential property taxes as a revenue source, the following have the lowest rates—Louisiana, Hawaii, Alabama, Delaware, West Virginia, South Carolina, Arkansas, Mississippi, New Mexico and Wyoming (listed lowest to highest). The average annual property tax in Wyoming works out to slightly more than 0.5% of the property value.
Some states allow retirees to exclude a percentage of their residence value for property tax purposes. Often the amount of the exclusion is tied to household income, with the size of the tax break declining as income rises.
Worst States: To pick the worst tax states for retirees I compared five different lists of the worst ten. Two states appeared on all five lists, four made four lists, and three more were listed by three raters. The two on all five lists were Minnesota and Vermont; the four that made all but one list were Connecticut, Nebraska, New Jersey and Rhode Island; California, Maine and New York made three lists. Iowa, Montana, Oregon and Wisconsin achieved dishonorable mention status by appearing on two lists each. You may want to eliminate all thirteen of these from consideration if you dislike paying taxes.
Best Retiree Tax States Overall: Comparing multiple lists to find the best tax states for retirees suggests the following nine. The most consistent choices were: Alaska and Wyoming; listed almost as often—Delaware and Nevada; frequently cited—Louisiana and Mississippi; also popular—Alabama, Florida and Georgia.
Next month we will look at some other considerations when deciding where to spend the rest of your life.
Alan Wallace, CFA, ChFC, CLU is a Senior Financial Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
