With many of us baby boomers increasingly worried about their finances in retirement, reducing what we pay in taxes is an attractive option. It’s one option that might not impact our lifestyles in any way. So, if you already live in a high tax state, voting with your feet to escape some of those taxes might be a good idea.
The principal state taxes you typically face in retirement are income, property, and sales taxes. Gasoline, cigarette, and estate taxes certainly exist, but they probably won’t be deal breakers for most people.
The various states that have income taxes differ considerably on how they treat social security benefits and pensions. Your particular situation could have a significant impact on the taxes you pay. For example, if you will get a large military pension you might want to consider a state that considers that income exempt. Some states tax social security (or part of it), and some do not. A few states only tax out of state pensions, while others give exemptions for some government pensions. Many states have a wide variety of exemptions for veterans, people over 65, etc. In some cases those could be big factors. The trick is to research the states you are considering, and know the tax situation before you move. For more specifics about which states tax what kinds of benefits, see Most Tax-Friendly States for Retirement.
Property tax is often the largest tax that retirees pay, so that factor is definitely worth considering in deciding where to live. States like Florida, California, and Arizona have programs that limit how much the appraised value of full time residents’ home can go up, which can be a very important protection. On the downside, these states are now having problems raising enough revenue, so who knows what might happen in their future fiscal troubles.
These states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income.
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have any sales taxes. Note that in the states that do have sales taxes, local municipalities often have the right (and do) charge additional city sales tax.
State Tax Burden
The Tax Foundation reports on and ranks each state for its tax burden. You can find the entire list at the Tax Foundation Research.
Not the Only Consideration
A word of caution. Taxes should not be the tail that wags the dog. Being close to family should be a lot more important, as is the type of community and environment you want to live in. You can always change other factors to make ends meet: you can take a part-time job, move to a smaller or less fancy house, or move to a lower cost state.
Kiplingers has a terrific article on tax-friendly states at Yahoo Finance, along with many other factors you should consider about state taxes and your decision to move.
Topretirements has individual state guides to retirement, each of which has a detailed section on retirement tax factors for that state.
Barron’s article, “Fleeing the Tax Man“, is a great read that explains the flight from high to low tax states.