Living Well in Retirement
Tax-Friendly Places to Retire
The financial climate is more pleasant in some states than in others.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, October 2009
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Maybe you’re thinking about relocating in retirement, in hopes of enjoying milder weather and lower expenses. Before you make a move, it pays to assess the overall tax burden of your future home. Some states that are currently tax-friendly could get a lot less chummy as they scramble to find new sources of revenue to plug gaping holes in recession-shredded budgets.
No matter where you live, your federal taxes will be about the same. But you’d be amazed at how much your state and local tax burden may vary from one location to another. And if you itemize deductions, how much you pay—and deduct—in local property taxes could affect the bottom line of your federal return, too.
However, in 2009, if you don’t itemize, you can boost your standard deduction (usually $11,400) by up to $1,000 for property taxes paid on your principal residence, if you are married and file a joint return. Single taxpayers who claim the standard deduction can boost their $5,700 write-off by up to $500. People planning to retire “often use the presence or absence of a state income tax as a litmus test for a retirement destination,” says Tom Wetzel, president of the Retirement Living Information Center (www.retirementliving.com). “But higher sales and property taxes can more than offset the lack of a state income tax.”
Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—have no state income tax. Two states—New Hampshire and Tennessee—tax only dividend and interest income that exceeds certain limits. But many of the remaining 41 states (and the District of Columbia) that impose an income tax offer generous incentives for retirees. If you qualify, moving to one of these retiree-friendly areas could be cheaper than relocating to a state with no income tax.
Plus, in tough economic times, states without a personal income tax have fewer sources of revenue and are more likely to raise property or sales taxes and other fees to shore up their budgets. State tax revenues plunged nearly 12% during the first three months of 2009, the sharpest decline on record, reports the Nelson A. Rockefeller Institute of Government. And it may take states years to make up the shortfall.
Despite the dismal economy, there is one bright spot for retirees on the move: falling home prices. “We see exceptional opportunities in some sought-after retirement destinations,” says Mary Lu Abbott, editor of Where to Retire magazine (www.wheretoretire.com). If you thought locations such as Naples, Fla., Scottsdale, Ariz., and Hilton Head, S.C., were out of your price range, it could be a good time to take a second look. Property taxes, however, have not been moving down as quickly.
For a state-by-state tax guide, including special exemptions for seniors and a rundown on how various types of retirement income are taxed, see our interactive retiree tax map.
Pensions
Although most states that impose an income tax exempt at least a portion of pension income from taxation, they often treat public and private pensions differently. For instance, ten states—Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania—exclude all federal, military and in-state government pensions from taxation. But Kansas taxes public pensions from all other states. Pennsylvania and Mississippi, by contrast, exempt all retirement income—including distributions from IRAs and 401(k) plans.
Some states have special breaks based on age or income. For instance, New Jersey allows residents 62 and older with incomes of $100,000 or less to exclude up to $20,000 of private-pension income from taxes. New York allows residents 59½ and older to exclude up to $20,000 of private or out-of-state public pensions from taxes, regardless of their total income. In Michigan, individuals can exclude up to $43,440 of private-pension income ($86,880 for married couples) from state taxes in 2009.
Three states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, they also have high top tax brackets: California (9.55% on income less than $1 million), Rhode Island (9.9%) and Vermont (9.5%). Connecticut and Nebraska also fully tax retirement income, with top rates of 5% and 6.84%, respectively.
Reader Comments (30)
Posted by: Jim at 08/19/2009 05:13:56 PM
Great article on Tax friendly places to live Mary Beth!
Posted by: Brenda at 08/19/2009 08:20:17 PM
The state of MD does not have anything for its seniors! Most of my retired family have moved out of MD to WV, PA, and DE. We are looking for our retirement home -- just have not found the right place yet, but we are sure that we will be leaving MD!
Posted by: bev at 08/20/2009 03:02:21 AM
Help me out here; if one elects to take a lump sum pension benefit and rolls it into an IRA etc. tax free, does that eliminate the state pension tax? Thanks for clarifying.
Posted by: Kathy at 08/20/2009 10:46:20 AM
Same for us Rhode Islander's. Moving out of this highway robbery state. Need new politians that can make a difference for the better.
Posted by: regina at 08/20/2009 03:45:14 PM
The Maine estate tax is pretty obnoxious in my mind , but was hardly noted in your article...We are looking to move from Maine.
Posted by: Bob at 08/20/2009 08:11:18 PM
As of 2008, Ohio now excludes military pensions from Ohio income tax.
Posted by: CD at 09/03/2009 06:47:50 AM
Come on down to Alabama. I don't know why we aren't considered pension friendly. We do not tax any defined benefit pensions, military etc. Our property taxes are dirt cheap. I guess what gets you is sales tax which where I live is 10%. And it's on everything even food. But seniors don't really buy as much as younger people. Just MHO.
Posted by: Bern at 09/03/2009 07:47:20 AM
Why do consistently exclude Tennessee from the states with no personal income tax? Do your homework. Thank you. Editor's Note: Tennesse doesn't have a tax on personal income for the most part, but it does tax interest and dividends. Hope this helps.
Posted by: ROG at 09/03/2009 07:47:56 AM
IM GLAD YOU MADE TENNESSEE LOOK LIKE WE HAVE AN INCOME TAX! WE HAVE ENOUGH YANKEES MOVING HERE ALREADY!
Posted by: Don Pengelly at 09/03/2009 08:05:57 AM
Please do not give everyone the wrong impression about Texas. While we do not have a state income tax, our property taxes are some of the highest in the country. In Texas, you never really own your home or property, you are just leasing it from the County in which you live. The property tax on my home is approximately $12,000 per year. The same home in New Mexico would cost approximately $3000 a year in property taxes. At my income level, I pay approximately 15.2% of my after federal income tax money in property taxes. Trust me, you would be far better off living in New Mexico with their state income tax rate of 5% or 6% and their low property taxes than living in Texas with no property tax. When I retire, I will not be able to afford to live in Texas, even though my home is paid for. I will be forced to sell my home and move to another state that is more friendly to retired people.
Posted by: Joanne at 09/03/2009 09:04:26 AM
I just recently visited my son's new residence in Texas. We both purchased cell phones, and the tax was 8.25% on those purchases, just as high as California.
Posted by: Denise at 09/03/2009 09:25:29 AM
Let me get this straight. If I do not have a 401K or an IRA thus paid state income taxes on every dime I earned when I live off of the income generated by my non-shelter accounts I will get no tax break. A pension, 401K, IRA sheltered as it went into these accounts was state tax exemp and now many states exempt the income again. What sense does this make???
Posted by: Catherine at 09/03/2009 09:51:40 AM
I Love New York? Not so sure any more, but family and friends live here. Do I really want to start over somewhere else with "There's no place like home" repeating in my head? There are no guarantees that it won't be just as bad someplace else soon.
Posted by: Mike at 09/03/2009 10:16:01 AM
Don't forget MAssachusetts that taxes private pensions and IRA withdrawals
Posted by: a. himes at 09/03/2009 10:40:58 AM
Does anyone know if Ohio taxes Federal Government (Postal Service) pensions?
Posted by: Susie at 09/03/2009 10:50:35 AM
In the state of Florida, there is not state sales tax. Living is fairly cheap. Although it is hot, so A/C runs most of the year, we do not need heat, except may be when it gets down in the 40's a couple of 3-4 days a year, if that. Living here is very casual so one does not need fancy, expensive clothing unless you are a socialite who frequents the galas at Trump's Mar-A-Lago in Palm Beach or other Palm Beach affairs. Yes, life is not bad here.
Posted by: M. S. Mennard at 09/03/2009 12:11:19 PM
When considering relocating to an area subject to disasters (hurricanes, tornadoes, etc.), check out what the insurance rates will be on your property. It sometimes offsets the savings in state taxes.
Posted by: ewv at 09/03/2009 12:12:56 PM
Maine is currently expanding the sales tax and has one of the hightest state and local tax burdens in the country. In the face of revolt there is a lot of tax shifting to placate some groups at the expense of others to try to keep taxes and spending up. There is a constant stream of new tax proposals hammering people for new or higher taxes. For retirees in particular, Maine imposes a horrible estate tax, has attempted to tax Social Security, and has a policy of trying to "export" taxes to non-residents, both in the law and through unbelievable shakedowns by Maine Revenue Services using enormous discretionary powers to spersecute people who can't defend themselves. Maine has become the "Georgia speed trap" of taxation.
Posted by: Michael Riley at 09/03/2009 12:20:55 PM
There are 5 republican senators out of 38 in the state assembly in Rhode Island. 11% of registered voters are republican. Need I say more?
Posted by: Karen at 09/03/2009 01:04:23 PM
Nebraska is the "tax me" state! Not only do they tax your pensions and part of your social security income, there is a "wheel tax" that we pay each year when we renew our license, we have income tax, we have sales tax (7.5%) on everything but groceries and the property tax in Douglas County (Omaha) is horrendous! For a house appraised at just over $200,000, we pay just under $6000 a year in property taxes and this is just on a regular city lot! Not on a lake, or an acreage, or with any special view, just a run of the mill regular city lot!!
Posted by: jean at 09/04/2009 11:23:34 AM
Ditto to what Karen says. And you can't blame the Democrats. Nebraska is a heavily Republican state and has some of the highest property tax rates in the nation. Certain counties in the state also have some of the nation's highest poverty levels. Amazing. Won't be retiring here.
Posted by: Ken at 09/06/2009 12:55:41 AM
Dear Karen, If you think Nebraskas taxes are high, try living in New York? Taxes are supreme, and we're number one in just about everything when it comes to taxes! Dear Jean, Where in Karens comment did she mention a political party? Stop protecting those [Democrats] that want to rule over you as in health care! You should live in New York for a while, and then go home and see what you have?
Posted by: TG at 09/09/2009 09:43:57 AM
I have to agree with everything EVW says ... Maine is horrible with taxes. It's hard enough to try to make a living hear, and it is just as hard to die here, with the horrible estate tax. I have heard that for as long as I can remember... "Maine's a nice place to live, just don't die here." Actually, Maine is a nice place to VISIT, because making a good living here is next to impossible. And pretty soon people won't want to visit, either, because of all the new taxes that just went into effect which are supposedly aimed at tourist, although they also hurt residents as well. And even with all of these taxes, the Maine government still can't get a hold on the budget - I just read an article a couple weeks ago about how they needed more money to fix the "general fund", so they dipped into the account that is set aside for the 911 system, which is funded from an extra tax on our phone bills. And their answer to replace it? Just raise the 911 tax again!!...
Posted by: EF at 09/09/2009 12:28:22 PM
If you are looking for the cheapest place to live -- retired or not -- it almost has to be Texarkana, Arkansas -- not to be confused with Texarkana, Texas. To make the city of Texarkana competitive with its border neighbor, residents of Texarkana, Arkansas, have been exempted from the Arkansas state income tax. These residents also have the other tax benefits of Arkansas -- some of the lowest property taxes in the country, etc. Residents of Texarkana, Arkansas, have the best of both worlds. Since the schools on the Texas side are generally considered superior, it is not unusual for residents of Texarkana to rear their children in Texas, then move to the other side of town when the kids are out of school. Perhaps foolishly, I live in Texarkana, Texas.
Posted by: Larry Pascal at 09/21/2009 01:44:56 PM
As a result of the North Carolina Supreme Court's decision in "Bailey v. Satete of North Carolina", North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefit plans,such as the North Carolina Teachers and State Employees Retirement System, the North Carolina Local Governmental Employees Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989. NOTE: Other conditions apply in certain cases. From NC Tax Guide.
Posted by: Betty at 09/26/2009 09:47:09 PM
North Carolina ranks quite high for taxes of various types. Counties and even some cities get in on the act as well. Collectively, my husband and I have lived in...Louisiana, Texas, Tennessee and NC. Our experience in NC is the worst. We believe too much money is spent in ways that are not necessary...
Posted by: Marty at 11/23/2009 09:00:45 AM
I'm looking at retiring in either Panama, Costa Rica or Ecuador where you can actually live on your retirement funds. Seniors don't stand a chance in the U.S. any longer.
Posted by: LLR350 at 11/30/2009 12:48:28 AM
WHAT ABOUT PUERTO RICO ?
Posted by: Tez Kantor at 12/10/2009 01:23:01 PM
Hola!! I live in McAllen-Edinburg-Pharr. We do not pay State tax; but we pay $ 2.75 per each $ 100.00 house value. Of course, the assessment office chief/king Rolando Garza increases (inflates) a lot the house values every year. And there are areas in these cities where we do not have infrastructure: decent streets, street lights, sidewalks, city parks, etc. We pay Sweden taxes with Sudan infrastructure. And we pay 8.25 % in retail sales.
Posted by: LEE at 01/25/2010 11:41:54 AM
where does tennessee stand on taxes social security?