Many people believe they are moving to state tax havens, but they really are not. That often is the case with people who move in retirement.
When all types of taxes are added, taxes are one of the top three expenses of many retirees.
That’s why many Americans want to move to low-tax states after retiring.
But retirees often don’t reap all the tax benefits they expected, because they didn’t examine the details of state and local taxes. The details are important.
Finding a true state retirement tax haven can be tricky.
States and localities assess many different types of taxes: income, real estate, personal property, sales, and sometimes more.
Because of differences in the types and amounts of income as well as property owned, a state that’s a tax haven for one retiree is a tax burden for another. A state that has high taxes for most working taxpayers might be a good deal for a retiree.
A state without an income tax isn’t automatically a tax haven, because other taxes are imposed. A retiree who moved to an income tax free state could pay as much or more in total taxes as in their old state.
Another factor to consider is that state and local taxes change frequently. Over time, a state can become either more or less tax-friendly to retirees.
Some states and localities balance their tax base, receiving revenue from a mixture of different types of taxes. Others depend on one type of tax for most of their revenue.
To know how much you’ll save by moving, consider all the types of taxes imposed by both state and local governments in your current area and others you are considering.
Examine how the taxes would be imposed on you. Taxes will vary by person or household depending on age, types of income, property owned, and shopping habits. For example, most states with sales taxes exempt food and medicine, but some don’t.
Texas has no income, estate, or inheritance taxes.
But the combined state and local sales tax rate is the fourteenth highest in the nation at an average of 8.2% (groceries and prescription medicines are exempt), according to the Tax Foundation. Motor vehicles are subject to the full sales tax, which can add a lot to the cost of a vehicle.
Real estate tax rates in Texas are among the highest in the country, and Texas has less generous property tax breaks for those 65 and older than some other states.
But it is total taxes that count, not the amount of any particular tax. The total per capita tax burden in Texas is low, ranking 47th among the states at $2,718, according to the Tax Foundation.
Washington also doesn’t have a personal income tax, but it more than makes up for that with high state and local sales taxes (fourth in the nation), average property taxes (ranked number 24), and an estate tax.
The result is Washington has the thirteenth highest total per capita tax burden.
Florida also has no income, estate, or inheritance taxes but doesn’t increase other taxes as much as Washington or even Texas. The Florida state sales tax rate is 6%, and localities can add up to 2%.
Florida is ranked number 28 for both sales and real estate taxes by the Tax Foundation.
In general, states without income taxes are tax havens for retirees but not all of them are.
Many states without personal income taxes generate substantial revenue from other sources. Wyoming, South Dakota, Texas, and Alaska, for example, receive a lot of revenue from the energy industry. Nevada has the gaming industry as a tax base, and Florida has tourism.
It’s also important to look beyond state level taxes. Many states allow local governments to impose a sales or income tax (or both) on top of the state tax. In most states, real estate and other property taxes are determined wholly or primarily by the locality.
The result can be different tax burdens in different parts of the same state.
In states with income taxes, retirees should look at more than the tax rate. The details of how taxable income is determined are critical. A state with a relatively high income tax rate sometimes is a tax haven for retirees.
There are three state income tax breaks for older Americans that are generally available: exemption of Social Security benefits; exemption of pension payments and retirement plan distributions; and additional exemptions, deductions or credits for those above a certain age.
Each state with an income tax offers at least one of these breaks. Some states exempt additional types of income that are important to retirees, such as interest, dividends or capital gains.
Only 12 states don’t fully exempt Social Security benefits, and some of them provide a partial exemption or exclusion.
Many states exempt other types of retirement income, such as employer pensions, IRA distributions and more. South Carolina, for example, currently provides an exclusion of up to $10,000 of retirement income. It also allows a deduction of $15,000 for taxpayers age 65 or older, though the deduction is reduced by the amount of excluded retirement income.
Some states exclude only annuity-type employer pensions while others also exclude distributions from IRAs and other retirement accounts.
You also might look at gasoline taxes. California has the highest state gasoline tax at 68.1 cents per gallon. Illinois is second at 66.5 cents, and Pennsylvania is third at 58.7 cents. Some states add cap-and-trade carbon policies or similar charges to their gas taxes, such as California and Washington.
Most states exempt electric vehicles from their gas taxes, but many are thinking of replacing the gas tax with a tax on the number of miles a vehicle travels or imposing that type of tax on electric vehicles.
Some people should review the “sin taxes” such as those imposed on beer, wine, liquor, and tobacco. Washington, Oregon, Virginia, and Alabama each add more than $20 per gallon to the cost of distilled spirits while Missouri, Colorado, and Texas each impose a tax of less than $3.00 per gallon.
In 17 states, state-controlled liquor stores have monopolies that essentially use prices to impose taxes on buyers.
There also might be personal property taxes on the values of vehicles, boats, trailers, and perhaps other items.
Some local governments impose charges that are included in bills for utilities, such as cell phones, internet, and cable television.
Be sure to monitor changes. Ohio used to exempt most retirement income of those 65 and older from its income tax. But now pensions and retirement plan distributions are taxable.
You might want to consider a few other factors.
Some states and localities have lower taxes because they don’t provide services that other states or localities do, such as trash collection or free admission to state and local parks. Residents pay for these services in other ways.
A couple of online tools can help with your search.
The Tax Foundation has excellent details and rankings. It has an overview that calculates the per capita tax burden in each state and ranks the states by tax burden.
It has other sections showing some details of the major types of taxes at both the state and local level and ranks the states by each type of tax. See www.taxfoundation.org.
The basic information for most types of taxes in each of the states can be found at https://www.retirementliving.com/taxes-by-state.
You can learn the big picture at these two sources, then use the websites of state and local governments for the details.
Taxes shouldn’t be the main determinant of where you live in retirement. But if you are thinking of relocating in retirement, you should estimate carefully how much you’ll pay in total taxes.
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