When It Comes to Taxes: What Is Your Best State for Retirement?

We arrived in Texas many years prior to retirement due to job relocation. Not having a state income tax is nice but only for the fact that we don't have to do another tax filing each year. The big taxes here are property tax and sales tax. Both are pretty high. As the article states, sales tax is a big factor when buying a new vehicle but is a moderate expense otherwise and some things are exempt from the sales tax. The big tax expense, especially for a retired person, is the property tax. In Texas, schools are primarily funded by property tax. Each school district sets its own property tax rate and they can vary widely. In 2021 we downsized and moved to a more rural area in the next county. That area is now rapidly growing and the need for new schools is increasing the property taxes. In addition, each municipality levies property taxes as well as other taxing authorities such as community college districts, public hospital districts and county taxes. Many of these taxing authorities do offer a reduced tax rate for seniors and disables residents and that helps but if your property has greatly appreciated over time while your income has declined in retirement, your property taxes are going to be something to be considered in retirement.

First a correction to one statement in the article. The sentence “Just because a state has no income tax doesn’t mean you should rule that state out.” The word “no” should be replaced by “an.” The rest of the article and the note from LS are excellent reminders that a zero state-income-tax can mask other costs that might affect your decision on where to live. First, calculate overall cost of living, of which income tax is just one component. More important, consider your own situation and lifestyle. If you require, or expect to require, high quality healthcare, for example, hospitals in an income tax state might offer more options than a Texas or Florida. Seeming intangibles like traffic, extreme heat summers, climate disasters (and flood insurance) and distance to airports if you travel for leisure or to visit the grandkids might persuade you to look more seriously at states with an income tax. Finally, avoid the common knee jerk mistake that zero state income tax will protect your retirement assets. If you are a billionaire, sure. But if not, not necessarily.

Thanks for the correction Larry. We have amended the article per your suggestion. We agree, tax friendly is a little more complicated than it first appears.

As briefly noted by the article's bottom line, it's important to remember that taxes are just ONE of the elements to consider. Low taxes might mean many fewer or poorer amenities (libraries, community centers, community pools/parks, adult education, etc.). If you have to pay a high HOA fee or pay privately for those types of resources, that could quickly offset tax savings. Likewise, a higher cost of insurance, real estate, school or personal property taxes to offset income taxes, a high sales or gas tax, and other expenses could quickly cancel out any benefit from an income tax saving. And that's all before people look at things like the cost of living & housing, availability of good medical care incl. nursing homes if anticipated, whether family is nearby (for people who consider that), estate taxation and other considerations. When I was planning my retirement a few years ago, I had a big whiteboard spreadsheet to compare things that were important to me for each of the states I was considering. Very nerdy! The results were surprising. PA, for ex., ended up with a net cost of living lower than FL since it didn't tax 401K withdrawals, its sales tax had more exclusions and FL's insurance & HOA costs would have been much higher. Of course, things change and everyone has different criteria. (Ultimately, I threw all my research away and decided to retire near family. Not the cheapest option or most expensive option, but for me it was the best choice LOL)

I agree with the tax issues here. You may not pay the state but you best believe there are many other taxes you'll pay to make up for it. There's no way any govt. can survive and provide services without taxing something. They tout that a lot in NV for sure but it's made up in the casinos, business licenses and a host of other things. That was my first experience with it. While not filing a 2nd tax return sounds good there's a hidden set of taxes that you need to explore to understand "why" that state is tax free. No govt. can survive without taxing its citizens. I'm moving to FL next yr. My friends already told me the property taxes are insane and insurance is expensive. I knew about the insurance and the property taxes are high from what I've seen. HOA fees too wow! I'm currently looking for a place that doesn't have high HOA fees. They go up annually and can easily replace a mortgage payment. The high cost of living in America is a huge problem. It needs to be addressed and lowered. I believe in Capitalism but not greed and taking advantage of people.

I live in Florida, my daughter lives in Hawaii. My HOA fees are only $191 a month, property taxes are high, but the cost of a real estate transaction is low, as compared to Pennsylvania,from where I came. Closing costs are cheap.
Hawaii has high state income tax, but super low property taxes, as long as you are a year round resident