Retirees: Tax-Friendly States

What states tax retirees the least? That’s something to ponder as you plan where to retire to. It’s not the predominant factor, but an important consideration.

Kiplinger’s put together an interactive map that shows tax friendliness for retirees. The magazine has links to states with no sales tax, or low sales taxes, no income tax and more.

Five of its top 10 are in the South, a band stretching from the Atlantic to the Gulf Coast: South Carolina, Georgia, Alabama, Mississippi and Louisiana. Then there is Alaska and two in the West, Nevada and Wyoming. Perhaps surprisingly, two states in the Northeast are in that roster, Delaware and Pennsylvania.

In Alabama, for instance, Social Security is not included in state income tax. Seniors do not pay state property taxes and may be exempt from local property levies. Plus, Alabama has no state inheritance or estate tax. Pennsylvania is also generous to retirees, with Social Security and all types of pensions excluded from state taxation. Plus, the state does not tax distributions from 401(k)s and individual retirement accounts.

Neighboring New York is on the list of the 10 least tax-friendly. According to the Tax Foundation, cited in the magazine, New Yorkers pay 12% of their income in state and local taxes. It has some of the highest property taxes in the nation. On the positive side, it does not tax Social Security and authorizes localities to grant property tax breaks to seniors.

Montana, right next door to tax-friendly Wyoming, also is on the 10 worst list. While it does not have a general sales tax, it nicks most forms of retirement income, including Social Security. It does permit exemptions of up to $3.760 per person on pensions and annuities.

The magazine notes that four states have no sales tax, in addition to Montana: Delaware, Vermont, Alaska and Oregon.

However, I post this with reservations because such an approach to making decisions has the tax tail wagging the decision dog. More important than taxes in choosing a retirement locale, I think, are the weather, the prevalence of natural disasters (lots of hurricanes or tornados?), other family members’ locations, hobbies, work, among other factors.

Governments need some source of revenue to fund themselves. If they don’t tax one thing, it is likely they tax something else. Thus, you need to look at how your affairs are currently structured, or would be if you moved. 

See if you are leaving a place where taxes are structured one way (say income taxes on retirement income) only to find they are higher elsewhere. Maybe your new home state has no income tax, but property taxes are so punitive that they outweigh the lack of an income levy.

Finally, in light of tax revenue shortfalls in many states and localities, taxes are likely to rise everywhere.

Another handy website for tax comparisons is the Federation of Tax Administrators. The Tax Foundation’s calculators and data tools sections may also be helpful.

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Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning.

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