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Six Taxes to Consider When Choosing a State for Retirement
A state's tax friendliness (or unfriendliness) is determined by combining the total taxes paid per household in that state and comparing this amount to the tax burden in other states. However, while one state might be friendly for one retiree, it might be just the opposite for another, particularly if their sources of retirement income are different or if one person plans to own a home while the other person plans to rent one.
When considering your own situation, here are six taxes to factor in when looking for the best retirement state.
1) Income Tax. Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - do not tax income, including Social Security. Sounds good, yes? All are considered tax friendly, but there are other states, including Georgia, Louisiana and Mississippi, that do have an income tax but are considered just as friendly because they offer generous retirement income exemptions. Bottom line: just because a state does not have an income tax, it does not mean that the state is tax-friendly for retirement.
2) Property Taxes. These taxes are often high in states that do not have an income tax. For example, Texas has no income tax, but real estate taxes are nearly 2% in most towns. There are two factors involved when determining property tax. The first is at what percentage of assessed value a home is taxed and the second is the tax rate itself. If a $200,000 home is taxed at 100% of its market value and has a tax rate of 1.5%, then the annual taxes are $3,000. If the same home is assessed at 30% and has a 6% rate, then the annual taxes are $3,600.
3) Sales Taxes. States that do not tax income also often have high sales taxes. These are not only assessed at the state level but also at the county and city level and can easily add a percentage point or two to the overall sales tax rate. States that do not tax any sales include Alaska, Delaware and Oregon. Some states charge a sales tax but exempt food, prescriptions or utilities.
4) Social Security Taxes. The majority of states (37) do not tax Social Security benefits. The 13 states that do tax Social Security income may tax up to 85% of benefits. Yet some states that tax Social Security income, including Colorado, are considered tax friendly because they have low real estate tax rates, low income tax rates, low sales tax rates and/or generous exemptions on retirement income other than Social Security.
5) Estate Taxes. Fourteen states, including Vermont, Washington, Oregon, New York and Rhode Island, tax estates. This is on top of the federal estate tax (which applies to estates valued at $5.49 million or more). Six states tax inheritances, and two, Maryland and New Jersey, tax both estate and inheritances.
6) Retirement Plan Taxes. Some states do not tax Social Security but tax private pensions, including 401(k)s and IRAs. Others do not tax Social Security or private pensions but tax military and state government pension plans. The amount of tax may depend on age, income and marital status.
So it cannot be said that simply because a state has no income tax or does not tax Social Security benefits or has no sales tax or has low property taxes that it is a tax-friendly state for retirement. All taxes must be considered and weighed against each other to determine a state's tax friendliness. A person with Social Security income but little private pension income may save money in a state that does not tax Social Security benefits but does tax 401(k)s. Or a person with Social Security income who plans to rent a home in retirement might do best in a state that has high property taxes but no income tax. It all depends on your particular situation.
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