Location matters when choosing a retirement home
When you retire, you may find that there are many options when it comes to choosing where to live out your golden years.
Key factors in your decision-making will likely include climate, proximity to family, recreational opportunities, the cost of housing, and access to medical facilities. Prospective retirees should also take into account the amount of taxes they will owe in the state and city/town where they plan to have their primary residence. Developing a solid tax strategy now can help ease your financial burdens so you can truly enjoy the next phase of your life.
While not having to pay state income taxes generally sounds like a good deal, individuals who are thinking about relocating to states with low or no individual income taxes should also consider the other taxes that may be levied. States that have a low income tax burden often fund their governments by collecting other types of taxes — such as sales taxes, excise taxes, property taxes, capital gains taxes, estate taxes, inheritance taxes, and taxes on investment income.
Therefore, in addition to looking at the income tax rate(s) of their prospective retirement destination, individuals should also factor in the state and local taxes that may apply to their pension, Social Security income, investments, and other activities.
There are currently 7 states that do not have a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Meanwhile, 2 states — New Hampshire and Tennessee — do not impose a tax on individual income, but do have a tax on dividends and interest. A number of other states are known for having relatively low income tax rates, including Arizona, New Mexico, and Pennsylvania.
It is important to note that while some states may provide full exemptions on all of your pension income or Social Security income, other states only allow partial exemptions, and still others impose taxes all retirement income.
Arizona, California, Minnesota, and Wisconsin are among the states known for taxing pension income. Pennsylvania and Mississippi, on the other hand, fully exempt retirement income from taxation. A number of states offer partial exemptions, including Arkansas, Colorado, Georgia, and New York. Some states specifically exempt certain pensions from income tax, like those associated with Federal civil service, state or local civil service, and the U.S. military. Keep in mind that there may be eligibility requirements for some of these exemptions, such as age restrictions.
Although the majority of states impose taxes on pension benefits, only 14 states levy taxes on Social Security income — including Colorado, Connecticut, Kansas, Minnesota, and New Jersey. These 14 states either tax Social Security income to the same extent as the Federal government, or they offer exemptions for taxpayers with lower adjusted gross incomes (AGIs). In addition, some states exclude portions of Social Security income from taxation based on the age of the taxpayer.
Property taxes and sales taxes vary widely depending on the state or locality, and can change substantially over time, especially as property values decline and recession-hit areas raise taxes in an effort to fill gaps in their budgets.
Sales taxes are collected in every state except 5: Alaska, Delaware, Montana, New Hampshire, and Oregon.
To complicate matters, state and local taxes may be levied not just on consumer goods, but also on specific services — including landscaping, tax preparation and other professional services, medical care, and even personal services (such as haircuts and beauty treatments). A number of states exempt certain categories of food, prescription drugs, and clothing from sales tax, but others do not. Some of the highest sales tax rates can be found in Indiana, Mississippi, New Jersey, Rhode Island, Tennessee, and Minnesota. Moreover, gas and other fuel taxes, as well as cigarette and alcohol taxes, can also vary widely from region to region.
Consequently, future retirees should factor in the amount of driving they expect to do, as well as their lifestyle in general, when choosing a retirement home location.
Although property taxes can make up a substantial portion of a retiree’s overall tax burden, numerous states and local jurisdictions offer tax breaks on property taxes for homeowners over the age of 65. Many states offer various forms of property tax relief to senior homeowners — such as “circuit breakers” that put a cap on the percentage of a taxpayer’s income that must be paid in property taxes, or programs that “lock in” the assessed value of a property after the owner reaches a certain age, or arrangements that allow elderly homeowners to defer taxes until they move or pass away.
Because property taxes can be particularly volatile (especially in areas with struggling housing markets, fluctuating home prices, and foreclosures, future retirees should carefully examine the trends of property taxes over time in the place where they plan to retire. Looking into the types of property tax relief available in your retirement destination is an important part of your tax strategy.
For higher-income individuals, state estate taxes may also play a role in their choice of residence and retirement.
Take into account that a number of states enforce estate taxes in addition to the Federal estate tax. Several states also have an additional inheritance tax — for example, New Jersey and Maryland impose both estate and inheritance taxes.
Retirees should bear in mind that, in many states, estate and inheritance taxes are applicable to much smaller estates than those subject to taxation under Federal law. If you are planning to retire in the near future and you are considering a few different locations, it is a good idea to research all the taxes that may potentially affect you.