Tax Season and the Retiree
There are a lot to contemplate when considering the state in which to retire. Most want to be close to family and friends, the weather to be suitable for them, and what they hope to do in terms of activities. A consideration this time of year are taxes — one of life’s two certainties and, one often a large expense in retirement. It is never a good idea to seek out a retirement state based solely on tax burden but it is good to be aware which states fit your plans best for retiement.
So, find out how each state taxes your income and plan accordingly. Also consider how the state taxes your property and your consumption and you might want to consider how it taxes your estate. That should give you a state tax burden that you’ll need to cover during retirement.
Older Americans who planned for retirement often generate income from several sources during retirement, including income from wages or self-employment; Social Security; pensions; and personal assets, including taxable and tax-deferred accounts. Taxes on those sources of income, mean less money for your care and enjoyment. But don’t forget state and local property taxes, state and local sales and use taxes. You might pay plenty in property taxes and sales taxes.
Remember, what you save on income taxes in one state you might pay in property taxes or sales taxes. And vice versa. What you save on property and sales taxes in one state you might pay in income taxes – so calculate for your specific retirement situation.
One more note, for those who itemize deductions, there are five types of deductible non-business 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.
Your specific tax burden, will depend on whether you can take advantage of these deductions.
The states are listed in order of tax friendliness from an overall tax burden point of view:
1. Alaska: Alaska doesn’t tax personal income, including Social Security benefits and pension income. And, there’s no state-imposed sales tax. This is not to say that you won’t pay any taxes in Alaska – You’ll pay other types of taxes, such as property taxes.
2. Nevada: This state doesn’t tax income, Social Security benefits or pension income. And its property taxes are reasonable, too. Its sales tax, however, is higher than the national average.
3. South Dakota: 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.
4. Wyoming: There’s no individual income tax on Social Security benefits or pension income in Wyoming but property taxes and sales taxes tend to be higher than the national average.
5. Texas: In Texas, there’s no individual income tax. But property and sales taxes tend to be higher than the rest of the nation.
6. Florida: There are plenty of reasons why people choose to retire to the Sunshine state, the low tax burden being among those reasons. There’s no individual income tax on Social Security benefits or pension income with high property and sales taxes.
7. Washington: There’s no individual income tax on Social Security benefits or pension income. But if you plan on spending lots money while in retirement watch out for the high sales tax.