July 9, 2013 — We had a question from a colleague recently which, while mostly pertinent to the Carolinas, is broadly relevant to many retirees looking for answers to which states are the most tax friendly. Here is the question and our response.
Q: I have a relative who is thinking about retiring to either South or North Carolina. He’ll have a pension from Mass. as his largest source of income. Thoughts about which state might be better from a tax perspective?
A: In 2013 South Carolina situation appears slightly more favorable to your relative, if taxation is the issue. However starting in 2014 the states are much more comparable due to tax reform passed in 2013. Currently on most tax issues the states are relatively comparable, the big difference is that SC has better exemptions. Both states have income taxes with very similar top rates (7% or so) that kick in on very low amounts of income. Finding out state tax information for retirees can be difficult, as some states have better websites than others. SC is very helpful, NC not so much. Complicating this is the NC tax reform signed by the Governor in July, 2013, which lowered many rates. Please realize that state taxes are tricky, much depends on your unique situation. For the ultimate answers you should speak with a tax professional. One of the best pieces of advice we’ve heard is to fill out a sample tax return for a state before you move there, just to make sure you know what you are getting into.
Here is a comparison of SC and NC tax situations:
Here is what we say in our retirement guide to South Carolina about its taxes:
Tax Burden: South Carolina is a very tax-friendly state with the 37th highest tax burden.
Marginal Income Tax Rates. Income tax ranges from 3% – 7%, with the highest bracket kicking in quickly at $13,000.
Retirement Income Exemptions. Residents 65 and over have an exemption for the first $15,000 of income, of which up to $10,000 may be retirement income. People up to age 65 can deduct up to $3000 of qualified pension income. Most disability services are not taxable. Retired military can deduct up to $10,000 of their military benefits.
Social security exemption. Social security is not taxable.
Sales Tax: State sales tax is 6%, local communities can additional sales taxes up to 2.5%.
Property Taxes: SC is the 37th highest state for property taxes.
Homestead Exemption. People over 65 can exclude $50,000 of market value from property taxes.
Estate and/or Inheritance Taxes. The state does not collect inheritance taxes or estate taxes.
This link goes to a tax guide for new residents of South Carolina.
NC doesn’t tax Social Security either. It has some exemptions for government pensions, but it looks like there is a max exempt of $4000 for that – not much of an exemption nor as good as SC’s overall exemption. Here is a link to the NC instructions.
Here is what we say about North Carolina taxes in our NC Retirement Guide.
Tax Burden: The North Carolina state and local tax burden is 16th highest in the country (The Tax Foundation), but sure to improve with recent tax reform.
Marginal Income Tax Rates. North Carolina’s will go to a flat income tax rate in 2014. The rate will be 5.75 starting in 2015. There is a $7500 exemption per person.
Retirement Income Exemptions. There are some income tax exemptions for pensions, particularly for those with careers in the public sector and/or military pensions. The maximum exemption for public sector pensions is at least $4000 (depending on length of service) and $2000 for private pensions. Military pensions are exempt if there was 5 years of service by 1989, otherwise the limit is $4000. The somewhat confusing pension exemption rules are located on this North Carolina Department of Revenue”>NC State Retirement page. Tax reform might have affected some of these exemptions.
Social security exemption. Social security benefits are not taxed.
Sales Tax: Sales tax is 5.75%, above the national average.
Property Taxes: Property tax burden is well below average.
Homestead Exemption. There is a property tax homestead exemption for people over 65 who meet certain income criteria. Even better is a circuit breaker program for eligible people over 65 which limits your property taxes to 4 or 5% of your income.
Estate and/or Inheritance Taxes. North Carolina does not have an inheritance taxes; the estate tax was just eliminated.
For further reference:
See our newly updated State Retirement Guides, which feature snapshots of retirement tax issues as well as a lot of other helpful advice.
Comments: Do you have experience with taxes in either of the Carolinas. Please share your thoughts in the Comments section below