The Most Tax-Friendly States for Retirees
From Market Watch
By Robert Powell
There’s plenty to consider when you contemplate where to live in retirement. Especially high on the list of factors to consider are taxes — one of life’s two certainties and one of the largest expenses people face in retirement. Here’s a closer look at the states that are — if nothing else — the friendliest for income tax purposes, and, in some cases, fairly friendly from an overall tax burden, based on CCH and the Tax Foundation research.
This state might not seem like a retirement haven based on the usual factors considered such as, say, weather. But it might be the perfect place for one’s golden years if taxes are a concern. Alaska doesn’t tax personal income, including Social Security benefits and pension income. And there’s no state-imposed sales tax. There are, however, other types of taxes, including property taxes. State and local tax burden: Overall, Alaska’s 2009 tax burden of 6.3% of income is well below the national average of 9.8%, and the lowest of any state in the nation, according to the Tax Foundation. Alaska levies no general sales or use tax on consumers, but many cities and towns have a local sales tax. Alaska’s property taxes are, however, relatively high. Read more: Robert Powell’s column about tax-friendly states for retirees . Much of the analysis here is courtesy of Kathleen Thies, an analyst for CCH Inc., a Wolters Kluwer company.
Many retirees rely on income from several sources to make ends meet. If you fall into that camp, Nevada might be the place for you. This state doesn’t tax income, Social Security benefits or pension income. And its property taxes are reasonable. Its sales tax, however, is higher than the national average. Nevada’s state and local tax burden percentage has consistently ranked among the lowest in the nation, according to the Tax Foundation. It’s currently estimated at 7.5% of income or 49th nationally. Currently Nevadans pay $3,311 per capita in state and local taxes, the Tax Foundation reports. Nevada collected $1,318 per capita in state and local property taxes in fiscal year 2009, which gives it a rank of 21st in the nation. The current sales and use tax is 6.85%.
It might not be the first or even the second state you think of when contemplating where to retire. But South Dakota is nothing if not tax-friendly. The state doesn’t tax individual income, Social Security benefits or pension income. And the overall tax burden is among the lowest in the nation. The Tax Foundation estimates South Dakota’s state and local tax burden at 7.6% of income, which is 48th nationally. Currently South Dakota taxpayers pay $3,042 per capita in state and local taxes, according to the Tax Foundation. South Dakota collected $1,111 per capita in state and local property taxes in fiscal year 2009, which ranked 33rd in the nation, according to the Tax Foundation. South Dakota levies a 4% general sales or use tax on consumers.
There’s no individual income tax on Social Security benefits or pension income in Wyoming, according to CCH. But that’s not to say you won’t pay taxes there. Property taxes and sales taxes tend to be higher than the national average. According to the Tax Foundation, Wyoming’s state and local tax burden is currently estimated at 7.8% of income, which is 46th nationally. Property taxes in Wyoming, which is another state that collects property taxes at both the state and local levels, are among the highest in the nation, according to the Tax Foundation. Wyoming also levies a 4% general sales or use tax on consumers, according to CCH.
There’s no individual income tax in Texas, but property and sales taxes tend to be higher than the rest of the nation. For Texans, the state and local tax burden is at 7.9% of income, which is 45th nationally, according to the Tax Foundation. And currently Texas taxpayers pay $3,197 per capita in state and local taxes. Property taxes in Texas, however, are comparatively high. Texas is one of just 13 states that collect no state-level property taxes. Its local governments collected $1,475 per capita in property taxes during fiscal year 2009, according to Tax Foundation, making it the 14th highest in the nation. There is a 6.25% general sales tax on consumers, according to CCH.
There are plenty of reasons why people choose to retire to the Sunshine state, and the low tax burden is one. There’s no individual income tax on Social Security benefits or pension income. There are pipers to pay, however, in the form of property and sales taxes. Overall, Florida’s tax burden is 9.2%, which was 31st in the nation in 2009, according to the Tax Foundation. Floridians paid $3,897 per capita in state and local taxes. Florida collected $1,589 per capita in state and local property taxes in fiscal year 2009, which ranked 13th in the nation, according to the Tax Foundation. Florida’s sales tax is 6% — 6th highest nationally.
Another state not generally viewed as a traditional retirement haven is, however, income-tax friendly for retirees. There’s no individual income tax on Social Security benefits or pension income. But if you plan to spend lots of money while in retirement, Washington might not be your first choice. It has a relatively high sales tax. Washington collects property taxes at both the state and local level. And in fiscal year 2009, Washington collected $1,226 per capita in state and local property taxes, which ranks 26th in the nation, the Tax Foundation reported. Washington levies a 6.5% general sales or use tax on consumers, according to CCH.
Though this list represent states that are largely income-tax friendly now, it’s quite possible that friendliness will change as states grapple with ways to raise revenue to address fiscal health issues. In Michigan, for instance, the deduction for pension benefits for senior citizens is curtailed based on the taxpayer’s birth year and household resources, according to CCH. Currently, this deduction is limited by a dollar amount, but no other limitation applies. Two states didn’t make the most income-tax friendly list, but deserve an honorable mention, according to CCH’s Thies. Pennsylvania (pictured here: the Wilbur Chocolate Factory in Lititz, Pa.) and Mississippi exempt pension income from taxation. “Mississippi might be a great place to retire; it doesn’t tax pension income, but it does tax income so you have to look at the state income-tax rate,” Thies said. “It’s a bit deceiving to say retirement income is exempt.”
Of course, before moving to one of these income-tax friendly states, be sure to calculate your personal tax burden given all of your actual and likely sources of income, your spending patterns, and standard of living. Remember, what you save on income taxes in one state you might pay in property taxes or sales taxes. And vice versa. “There are no free lunches so you need to be savvy about what your particular needs are in retirement,” said Thies. One more note, for those who itemize deductions: There are five types of deductible nonbusiness taxes, including state, local and foreign income taxes; state, local and foreign real-estate taxes; state and local personal property taxes; state and local sales taxes; and qualified motor vehicle taxes. To calculate your overall personal tax burden, figure out whether you can take advantage of these deductions.
the original articles The Most Tax-Friendly States for Retirees