When It Comes to Choosing Your Best Place to Retire – The Most Important Financial and Tax Issue Might Not Be What You Think

Category: Financial and taxes in retirement

By Mike Brady

The power of cocktail party conversations should not be underestimated. Countless decisions on investments and other matters have their roots in the chit chat made over a glass of chardonnay and mustard soaked mini hot dog roll.  But when it comes to choosing a retirement location, this advice could be hazardous. The financial and tax issues that affect retirement choices are particularly difficult and confusing, yet of critical importance.   This article is intended to help you identify and prioritize them. 

Choosing a location as a great place to move for financial reasons based on one piece of information might be a very big mistake.  For example, an individual might hear that retirement income is not taxed in a state, or that the state has a low tax rate.  The reality might be that real estate taxes there are much more important in determining your overall costs.  There are other factors to consider as well such as sales taxes, local income taxes, personal property taxes and other fees, and taxes on the retiree’s estate upon death.  We will explain them below; we have also provided a Retirement Locations Tax and Home Comparisons” worksheet which you can use to summarize and compare relevant information for retirement destinations.

#1 Financial Issue – Cost of Real Estate and Property Tax
The cost of housing and related real estate property taxes are typically the most significant factors in determining the cost/benefits of moving to a particular location. For most people, these costs are usually far more important than income or sales taxes.  For example, if you currently live in New Jersey, the Zillow Home Value Index there was $270,100 in 2011,  and the per capita property taxes was the highest in the nation at $2,372 (in 2006, the latest year this data is available) . Contrast that with Alabama, where the Zillow Home Value Index was $102,500 and the per capita property taxes were $495 in 2008.  Perhaps this is an extreme example, but if you own the “median” home in NJ you could theoretically sell it, move to AL, buy the “median” home there – and still have $167,600 in your pocket. You will also see your per capita property tax decline by almost $1900/year.   No other tax saving could come close to the positive effect of these 2 factors.

To help you find this information there are numerous sources such as Zillow, Trulia, and Realtor.com that provide listings, historical transaction prices and indexes that can help a retiree get a sense of overall home prices and real estate taxes.  If a retiree invests the time to visit multiple properties in selected retirement destinations, relative real estate values and taxes become clearer.  Real estate taxes can differ greatly across localities and depend on the property value, assessed value, tax rates and the detailed rules for computation.   It is a good idea to keep a record of real estate taxes for properties visited and this will help you understand and compare the tax burdens for various localities.           

State Income Taxes
State income taxes can be a significant factor in certain circumstances.  There are some key factors to consider beyond the actual rates a state applies to taxable income such as the following: 

Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) do not have an income tax.  Two states (New Hampshire and Tennessee) tax only interest and dividend income. 

States have many tax breaks for income from social security, pensions and other retirement income sources.  Pensions and retirement income can include federal civil service pensions, military pensions, in-state local and state pensions, out-of-state local and state pensions, railroad pensions, private pensions, and 401k and IRA distributions.  The rules for taxing these various sources are different across the states so this can be complicated.  This income tax Addendum provides more information on this topic.
 
Many states have provisions that can lower the tax bill for retirees such as deductions for taxpayers over 65 years old, standard deductions and personal exemptions.

An easy and accurate way to determine the state income tax burden is to ask your tax preparer or financial planner to do a “pro forma” based on your situation to give you an estimate of taxes for a given location.  

For those of you who want to explore this on your own, each state has a web site that contains these rules. You can use this “Retirement Locations Tax and Home Comparisons” worksheet to summarize and compare relevant information for retirement destinations. The worksheet has been partially populated for Williamsburg, Virginia and Myrtle Beach, South Carolina. There is also a column for your present residence so you can understand how your present level of costs will compare with your retirement destination. You can customize it to add other factors that might be pertinent, such as home owners insurance.

Estate Tax
The majority of states have no estate tax and those that do have exemption amounts.  Only three states (New Jersey, Ohio and Rhode Island), have exemptions of under $1 million.   There also seven states (Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) that have an inheritance tax. NJ has both! While these taxes may not be a factor for many people, it is something that should be understood, particularly for a high net worth individual.  If you Google on state inheritance and estate taxes you will be able to get detailed information related to these matters in the various states.

Sales and Personal Property Taxes
Sales taxes are imposed by states and localities at various rates and certain purchases are exempt from sales tax.   Many local governments also tax the personal property of individuals and can impose other fees.  It is a good idea to understand these taxes although in most cases differences will not be significant enough to change your mind about moving to a location versus another.

Pulling it all together
Except for very wealthy people or those with considerable pension income, the #1 financial consideration for choosing a retirement state or city for most people is not income taxes. Rather, it is the relative value of real estate and associated property tax. The crazy quilt pattern of exemptions, tax rates, and a lot more make it impossible to say with authority that one state is a low-tax state – for everybody.  Each person’s situation is so different that would be an over-generalization. 

This information is subject to change and the author and publisher are not responsible for any variations from the information contained herein.  The information is given with the understanding the author and publisher are not engaged in rendering legal, tax or other professional advice.

Comments Anyone? What do you feel are the biggest financial determinants of retiring to another state?  Do you have a “best” and “worst” candidate? Let us know in the Comments section below.

For further reference:
See State Income Tax Addendum for more details. Use our “Retirement Locations Tax and Home Comparisons” Excel worksheet to help you assemble, understand and compare the tax information. Here is the worksheet in a pdf.
10 Worst States for Retirement – 2011
Not What You Thought: The Worst Retirement States for Taxes
Most Tax Friendly States
Five Reasons Why You Should Retire to Another State

About the Author: Mike Brady is a former partner with Deloitte and Touche. He has served as a financial executive with a number of companies and is now a private consultant.

Posted by John Brady on December 6th, 2011

11 Comments »

  1. Good points, Mike. And, moving to a community with high HOA dues can negate savings in other areas. I suggest you determine the desired lifestyle, then look at the financial implications. By the way, do you know Roger Cullinane – my husband – a (retired) tax partner with Deloitte.

    Jan Cullinane, The New Retirement: The Ultimate Guide to the Rest of Your Life (Rodale)

    by Jan Cullinane — December 7, 2011

  2. This information will really help me. I am a retired federal employee and I have a list of states that don’t charge state income tax. I love flea markets and thought I would move to Leesport PA where there is a huge flea market two days a week. Perfect to make some extra money to make ends meet and not have to pay state tax. Then my sister, who has a friend in Leesport suggested I not move there because they have a 7,000 a year school tax! I would never have known that. I know to look for car insurance rates, they can change greatly too. Thanks for the information.

    by Barbara Chaney — December 7, 2011

  3. Several observations.
    1. One site – http://retirementliving.com/index.html – has every state, every tax, every exemption. Plus thirteen other indices specifically for retirees – from 55+ communities through Senior Publications Online to State Aging Agencies.
    2. “The cost of housing and related real estate property taxes are typically the most significant factors in determining the cost/benefits of moving to a particular location. For most people, these costs are usually far more important than income or sales taxes.” But “you” don’t have to decide between housing costs and real estate taxes OR income and sales taxes: you can have your cake and eat it too (depending on your taxable income). Example: Florida’s home value index is $122,100, $20K more than Alabama’s. But, Florida has no income tax. Alabama’s 5% income tax starts at $3,000. So, after a few years, you’re ahead in Florida.
    3. Maybe. Alabama exempts almost every major source of income for retirees:
    “Federal Income Tax Deduction: Full
    Retirement Income Taxes: Social Security, military, civil service, state/local government and qualified private pensions are exempt.  All out-of-state government pensions are tax-exempt if they are defined benefit plans.
    Retired Military Pay: Pay and survivor benefits not taxed.”
    4. And I haven’t even started comparing the real estate exemptions available, or the sales taxes, etc. etc. etc., ad nauseum.
    5. Big house or little house? Rent or buy? Sources of income – dividends, pensions, social security, interest? Do you utilize the internet for purchases? Use retirementliving.com, or other germane indices, and start planning. 😯

    by oldnassau — December 7, 2011

  4. FYI- the above site referred to by ‘oldnassau’ requires a $25 “membership fee” in order to access the info. Just thought people interested in saving money should know that the exact same info is available on the web in numerous locations for free.:roll:

    by Scott — December 7, 2011

  5. I haven’t acted on it yet, but when I retired, I created a spreadsheet that included state and local income taxes, real estate taxes, cost of utilities, cost of insurance…on and on until I couldn’t think of anything else. I did my research and filled out the spreadsheet for the various locations my wife and I were considering. It’s not that we simply planned to move to the lowest-cost location, but at least this gave us information that we could use as a guide. Now, I would say these items could be more of a moving target than before, as one might want to be prudent in considering how taxes are going to change in the future, especially in cities and/or states where the economy is especially strapped.

    by Chuck — December 7, 2011

  6. Chuck, in case you didn’t see it, the article has a link to a state tax comparison chart. It is in the Further references section and in the state income tax section.
    Good luck

    OldNassau – As always, thanks for your sage comments. Good point, you can have your cake and eat it too (move from a high value home state to a low value new state, and escape income taxes). The answer belies the complexity of the financial considerations facing the retiree. AL (which we just chose an example because of its low home values and property taxes) does have a state income tax that kicks at in very low threshold. But unless you are a retiree with very high income from employment or investments, you in effect have no state income tax (ss and pensions are exempt). So the point is, as Mike pointed out, investigate your particular situation carefully before making a decision.

    by John Brady — December 7, 2011

  7. Is there a way to find out the cost of utilities (ie electricity in Florida in the hot summer)? I don’t imagine realtors would be terrifically candid if they’re trying to make a sale. And the cost of home/flood insurance can vary greatly depending on location. Any websites or links you could recommend? Thanks for all the great info.

    by Cheryl — December 8, 2011

  8. When we left Manhattan for a rural area in Southeastern NY State we were woefully ignorant of the effects of property taxes. We thought that we were leaving high housing costs behind and that we could live comfortably forever in the house that we bought for a very reasonable price. But the taxes are forcing us to move. Our school taxes alone are over $8000; county taxes add over half-again as much. I wish we had read this article nine years ago!

    by Mimjo — December 8, 2011

  9. To the other Scott: I was able to get the tax information on the site that oldsassau referenced without any membership fee.

    by Scott P — December 9, 2011

  10. […] Foundation Tax Burden by State Tax Friendly States The Most Important Issue Might Not Be What You Think Our 2011 List of the “100 Best Retirement Towns” Best Retirement States for […]

    by » Worst States to Retire 2012: Northeast and Midwest Come Up Losers Topretirements — January 10, 2012

  11. Actually, for some people who retire early and have pre-existing conditions, the lack of guaranteed coverage or a high risk pool may completely eliminate that state from consideration. Such is the case of Arizona, where we have lived since the 1980’s, paid off our mortgage and intended to stay after I retired. Unfortunately, there is no high risk pool, and insurance companies have declared that I have a pre-exising condition. We will be sadly leaving AZ for another state.

    by Jeanette — February 6, 2012

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