Finding a Tax Friendly State for Retirement: A Checklist

Category: Financial and taxes in retirement

April 30, 2013 — Note: This is part 2 of our Most Tax Friendly Places for Retirement series. Part 1 was “Finding Your Tax Friendly Place for Retirement“.

Let’s assume that you are a person looking for a tax-friendly state to retire. You need to start your search by realizing these key facts: your tax situation is going to be different in retirement from what it was during your working days, and because of that some of your current tax assumptions might no longer be valid. Here in Part 2 we will discuss some of the key tax issues that affect retirees, as well as provide a checklist to help organize your thinking.

A Key Change – Different Income
In retirement your income will probably be smaller, as the nice paychecks you’ve been getting all these years stop coming in. Your income will be coming from different sources: a part-time job, Social Security, possibly a pension, and investment income – and those sources will have new tax implications. You will probably also start drawing down and living on what’s in your savings and retirement accounts; some of which will be taxable and some not.

Tax Implications
No matter what state you retire to you will still probably have to pay some federal income taxes. Taxes on wages are pretty straightforward, as is investment income such as dividends and capital gains. Social security income is not taxable or only slightly taxed for most people, although those at higher income levels will pay taxes on it. As you start withdrawing your IRA and 401k money (but not from Roth funds) you will pay tax on all of that money, which was excluded from your income when it went into those accounts. Regarding federal estate taxes, you will pay taxes if your estate totals more than $5.25 million in 2013 (the exemption started out at $5 million in 2012 and is indexed for inflation).

State Taxes – Where It Gets Complicated
State taxes on retirees present an almost endlessly complicated picture. So if finding a tax friendly state or town for retirement is important to you, a first step is to carefully evaluate your personal tax situation against the tax environment in the towns and cities you are considering. Note that the one area of taxation you do have some control over, without moving out of state, is in your property tax. If you are paying too much property tax, consider moving to a smaller home, or renting.

Since everyone’s situation is different, this checklist is meant to help organize your thinking when considering the tax implications of different retirement states. It is by no means complete, but meant as a starting point for you to make meaningful comparisons. As several Topretirements members have suggested, the only accurate way to make comparisons is to have a qualified tax professional prepare a state pro-forma tax return using your data. If you have suggestions for how we could improve this checklist, please use the Comments section below.

Your Tax-Friendly State Checklist
Income Taxes
Is there a state income tax (7 states do not) _Yes _No
Are wages excluded but not dividends and interest (TN and NH) _Yes _No
Is it a flat tax or a graduated (progressive) tax? _Yes _No
Is there a personal exemption, and how much is it? _Yes _No _________
Would you qualify for a credit or exemption based on your income, age, disability, etc.? _Yes _No
Are state income taxes deductible? _Yes _No
What rate would you pay, based on your taxable income (you need to answer some of the questions below before you can complete this one)? __________

Social Security Taxes
Is SS income taxable in this state? _Yes _No
If taxable, does it follow federal pattern? _Yes _No
Are certain amounts exempt? _Yes _No

Taxation of Pensions
Do you have a pension? _Yes _No
What type of pension (s), if any, do you have? ____________
Is it a railroad, military, federal government, or state or local government pension? _Yes _No
Is that type of pension excluded in the state? _Yes _No
Is there a certain amount exempt from taxes? _Yes _No

Retirement Distribution Taxes
Are distributions from retirement accounts like 401ks and IRAs taxable? _Yes _No
If taxable, are certain amounts exempt? _Yes _No


Property Taxes
What would the property (local and/or state) tax be on the home you are considering? _Yes _No
Are there applicable exemptions or tax credits such as being over 65, disability, lower income? _Yes _No
Is there a Homestead or similar program that limits tax increases, the % of home value taxed, or the rise in assessed value (such as in California and Florida). _Yes _No

Sales Tax
Is there a state and/or local sales tax? (5 do not charge it) _Yes _No
What is the combined rate? _______
Are important expense categories like food and clothing exempt? _Yes _No

Estate and Inheritance Taxes
What is the estimated value of your estate? ______________
Is there an estate tax in this state? _Yes _No
What are the exemption levels – same as federal ($5 million indexed to inflation) or lower? ______
What is the tax rates that would apply to your estate? ___________
Is there an inheritance tax? (a tax paid by your heirs) _Yes _No
What are the inheritance tax rates that would apply to your heirs?______

Bottom Line
Your tax situation will probably change in retirement from your working days. It also won’t be the same as your neighbor’s. So if finding a tax friendly place for retirement is important to you, use this checklist to help you understand some of the many factors that will come into play for comparisons.

Comments. Please share your observations about this checklist and what might make for a tax friendly state for retirement in the Comments section below.

Sources for finding state tax information:
Finding Your Tax Friendly Place for Retirement: Part 1
Best States to Die in
Topretirements State Retirement Guides
Search on the Internet for department of revenue (and name of state)
Retirement Living Taxes by State

Posted by Admin on April 30th, 2013

14 Comments »

  1. […] we will explore the various kinds of taxes that might affect you as a retiree; Part 2 is “Finding a Tax Friendly State for Retirement: A Checklist“. See also this MarketWatch article on “Tax Friendliest States” for a slightly […]

    by » Finding Your Most Tax-Friendly State for Retirement: Part 1 Topretirements — April 30, 2013

  2. Do automatic tax preperation programs such as Turbotax calculate all these factors in the most beneficial way, or does going to a tax preparer in person give a person a better result?

    by Victor K. — May 1, 2013

  3. Could you discuss this further as it relates to full time RV’ers? Thank you!

    by Peggy Bradley — May 1, 2013

  4. We moved to Ada Ok. seven years ago because of my husband’s job. We are now retired and find Oklahoma not to be as inexpensive as you make it out to be. We live in a small town with a city sales tax of 9.888. Oklahoma also has a food tax which really needs to be considered when retiring. Our plan is to move back to Texas when the real estate market picks up.

    by Carole — May 1, 2013

  5. 1. For the RV’ers: Go to http://www.escapees.com/ (Escapees RV club).
    2. http://www.retirementliving.com/taxes-by-state has an interactive USA map: click on a state and get detailed information. The left-hand column has thirteen other sources for retirees.
    3. Pensions not taxed? In-state or out-of-state? public or private? check.
    4. Examine carefully the state’s residency requirements? Sometimes, 6 months + a day’ sometime, papers (taxes; driver’s license; voter’s registration).

    by Old Nassau — May 1, 2013

  6. Finding the information to even complete your list is confusing. Where does one go to find the info. I know about the “no income tax” states, but where does one find rates for other taxes in each state?

    Editors note: look at the bottom of the article for the references we provided, as well as Old Nassau’s suggestions above.

    by Claudia Viall — May 2, 2013

  7. Re Property Taxes:

    “Is there a Homestead or similar program that limits tax increases, the % of home value taxed, or the rise in assessed value (such as in California and Florida). _Yes _No”

    Keep in mind that in CA, the Homestead Exemption is such an insignificant percentage of the value of the property it’s practically worthless. BUT under Prop 13 you can lock in the assessed value when the property is purchased whatever your plans are for the property (e.g. You could derive rental income until you can owner-occupy the property.).

    However, in FL the Homestead Exemption can be a substantial percentage of the value of the property (e.g. There are still condo’s in 55+ communities where the Homestead Exemption could easily exceed the value of the property, even in today’s market.) BUT to maximize the value of a Homestead Exemption (up to $50k) on any property purchased at $50k and above, you need to be prepared to owner-occupy the property after closing. Additionally, owner-occupying the property will provide protection against future increases in assessments under Save Our Homes (This provision not unlike CA’s Prop 13.).

    So, when making relo decisions, always plan ahead and understand the tax implications of your real estate purchase and relocation decisions in the short term and over the long-haul. Good Luck!

    by Clark — May 2, 2013

  8. You listed California and Florida homestead tax reductions. Texas has the same thing.

    by susan — May 3, 2013

  9. “BUT to maximize the value of a Homestead Exemption (up to $50k) on any property purchased at $50k and above, you need to be prepared to owner-occupy the property after closing.”
    For clarity, the FL Homestead Exemption applies to the first $25k of assessed value, with some additional exemptions extended to the third $25k of assessed value. An owner-occupied property with an assessed value of $50k would receive the benefit of the Homestead Exemption on the first $25k only.

    by Clark — May 4, 2013

  10. Our Member Scott C brought a very interesting Morningstar.com article to our attention on this subject: “How Will State and Local Taxes Affect Your Retirement”. There are some very sophisticated thoughts and strategies in it http://news.morningstar.com/articlenet/article.aspx?id=595120

    by Topretirements editor — May 4, 2013

  11. Two thoughts:
    Before long there will be an internet sales tax to consider.Not sure yet how this will look.
    Also, sometimes, as in Alaska, the cost of goods is so much greater that even though there is no income and little sales tax, the cost of living is still much higher. So consider the whole picture!

    by Lulu — May 11, 2013

  12. What am I missing about DE as a tax friendly state. Looks ok, but not great for income tas.
    http://www.tax-rates.org/Delaware/income-tax

    by Elaine — February 24, 2014

  13. Does KY consider a 401K and/or an IRA a pension by their definition and therefor taxable? I have queried the KY dept of taxation and have not recieved an answer. They are in the process of reducing the pension income exemption from $40,110 to $30,000 for retirees.

    by Jeff — February 25, 2014

  14. With regard to the Florida real estate taxes: We moved into a condo that we had been renting out for quite some time and have made it our permanent residence, at least for now. So long as you are occupying the property on the first of the year and plan to make it your permanent residence, you can file for the homestead exemption. The counties also discount real estate taxes for a variety of reasons, including disability. So it is worth checking out.

    by Lynn — February 25, 2014

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