These States Have the Lowest Retirement Taxes
Seven U.S. states have no income tax
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Find the Right Balance Between Income, Sales, Property, and Death Taxes
When you’re looking for a place to retire, make sure you consider a tax climate that’s as sunny as the weather. While the federal rules apply to everyone no matter where they live, each state has a different tax policy. Some have stealth taxes that could pack a wallop for someone living on a pension. Others have high income or property taxes that could also trigger the alternative minimum tax at the federal level. While taxes shouldn’t be the final word in a decision about where to live out your Golden Years, they’re definitely worth researching.
Senior citizens should ask five key tax questions as they decide whether to relocate, according to CCH, a publisher of tax information based in Chicago:
1) How does the state tax my retirement benefits?
2) What are the income tax rates in the state?
3) What are the sales tax rates in the state?
4) How much property tax is charged?
5) Will the state tax my estate when I die?
Finding the right state from a tax perspective is trickier than it seems because savings in one area (income tax) may be wiped out by an unexpected levy (sales or property tax, a special tax on investment income). The right answer for you depends entirely on your financial situation and your primary income source during retirement. Any decision should be made in close consultation with your financial adviser. That said, here is a guide of which states tax what:
States with No Income Tax
Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Your retirement income from pensions is also sheltered in these states. Two other states, New Hampshire and Tennessee, don’t tax wages or income from pensions or Social Security, but they do have levies on income on dividends and interest (5 percent in New Hampshire, and 6 percent in Tennessee).
Other states have low rates. The top marginal rate is below 5 percent in Arizona, New Mexico, North Dakota, Michigan, and Pennsylvania.
Keep in mind that state budgets are strapped, so rates are subject to increases in the future. A comprehensive list of state tax rates published by the Federation of Tax Administrators, a nonprofit, nonpartisan group, can be found here (although laws change, so be sure to double check with the state in which you are interested to be sure the chart is current).
States that Don’t Tax Retirement Income
Each of the 41 remaining states has different rules for taxing retirement income. Two – Pennsylvania and Mississippi -- exempt pension income entirely from the state’s income tax. Four others allow a partial exemption. They are Arkansas, Colorado, Delaware, and New York.
Unfortunately, two warm weather faves do generally tax pension income: Arizona and California, along with Minnesota and Rhode Island.
States that Tax Social Security Benefits
Fourteen U.S. states tax income from Social Security. They include Colorado (which, if you’ll remember from two paragraphs ago, partially exempts pension income from tax), Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, North Dakota, Rhode Island, Vermont, and West Virginia. Note that some of these states offer breaks to low-income seniors.
States with No Sales Tax
Sales and property taxes can quickly erode the savings of retirees and place unexpected burdens on those with fixed incomes. Sales taxes, especially, amount to double taxation in retirement because you are paying with money from savings that’s presumably already been taxed once elsewhere.
Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. States with low sales taxes include Colorado at 2.9 percent, while Alabama, Hawaii, Georgia, Louisiana, New York, South Dakota, and Wyoming all have a 4 percent rate.
Half the states in the country charge a sales tax of 6 percent or more, with the highest being California (8.25 percent). Some do have preferential lower rates for essentials such as food and medicine. Still others allow cities, towns, and counties to charge their own taxes (the exceptions to this are Connecticut, Kentucky, Maine, and the District of Columbia.
States with High Property Taxes
All 50 states have some property taxes, although most provide some relief for seniors, especially those with lower incomes. On a county-by-county basis, the states with the highest property taxes include New York, New Jersey, Illinois, and Texas, as detailed here, according to analysis of Census Bureau data.
The Best States in Which to Die
Estate and inheritance tax laws are in disarray generally due to confusion at the federal level. About half the states traditionally have piggybacked on federal estate tax policies, which in recent years have affected only multimillionaires. But many are rethinking their own rates and tax-free allowances after Congress set a top federal of 35 percent that only begins applying after a $5 million is passed on to heirs tax-free. This is a moving target, so monitor developments in your favored state closely.
Kansas, Arizona, and Oklahoma all have no death taxes. No estate tax applies in Illinois Nebraska and North Carolina for people who died in 2010 unless the estate chooses to file a federal return (last-minute changes at the federal level give families this option because in some cases the $5 million allowance would totally wipe out any possible liability imposed by a substitute capital gains tax system that took the place of the federal estate tax). Lawmakers in Ohio are considering repealing its estate tax.
Generally speaking, about half the states have their own estate or inheritance taxes. They include Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, and Vermont.
Other Tax Factors to Consider
There are other taxes to consider as well. If you smoke, beware of high cigarette taxes in New York, Rhode Island, Washington, Connecticut, New Jersey, Wisconsin, Massachusetts, the District of Columbia, and Vermont.
If you drive a lot, know that fuel taxes are high in Washington, Minnesota, Idaho, Maine, North Carolina, and Rhode Island.
And different states have different rules for things like deducting medical expenses, taxing military pay, and other concerns for retirees. More details can be found here.
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