Moving to a ‘tax friendly’ state? Do your homework first

The COVID-19 pandemic has not stopped retirees from moving to other – mostly tax-friendly – states, according to a new study.In fact, almost 400,000 Americans relocated for retirement in 2020, according to HireAHelper, which conducted a data study using the latest Census Bureau survey to determine how retirees moved during this first year of the pandemic.“It is my strong sense that these cross-state moves in retirement are strongly motivated for financial reasons,” said Jaclyn Lambert, a spokesperson for HireAHelper.So, what might you consider if you plan to follow in the footsteps of those Americans who last year moved to a tax-friendly state?State taxes:  Which are the most tax-friendly states for the wealthy?Which states in the U.S. have the highest tax burdens?  Many can be found in North, NortheastFirst, review what your sources of income are now and will be in the future, and how the state taxes that income. According to a Wolters Kluwer’s report, the tax treatment of retirement, pension, and Social Security benefits varies widely from state to state. For instance, some states:Impose no income tax on retirement or other income.Exempt all or some retirement or Social Security income.Provide credits for retirement income.Tax all retirement income.“When relocating, it’s important to remember that tax-free states are like free lunches,” says Jean-Luc Bourdon, founder of Lucent Wealth Planning.  “There’s no such thing. States must generate revenue somehow, so there’s often a teeter totter relationship between state income tax and other taxes like property and sales tax.”For example, he notes that Texas has no income tax but has high property taxes. By contrast, Oregon has a high income tax but no sales tax. “So, it’s important for retirees contemplating a move to consider all taxes and how they apply to their unique circumstance,” Bourdon says.Others agree. “It is very important for individuals to do some pre-retirement homework on all the tax implications of retiring and moving to a new tax-friendly state,” says Robert Westley, a senior wealth adviser at Northern Trust. “Most individuals focus solely on the state income tax rate but there are other factors to consider such as sales tax, property taxes and even estate taxes.”Jean-Luc Bourdon, founder of Lucent Wealth PlanningWhen relocating, it’s important to remember that tax-free states are like free lunches. There’s no such thing.Earned income. If you intend to work for pay in your new state of residence, check the state’s income tax rate before placing a bid on a new home.According to Wolters Kluwer, income tax rates can play a big role in where a person chooses to retire and those rates can vary greatly depending on location or income.  For instance, Wolters Kluwer reports California, the District of Columbia, Hawaii, Iowa, Minnesota, New Jersey, New York, Oregon and Vermont all tax the top income brackets upward of 8%.Meanwhile, Arizona, Colorado, Illinois, Indiana, Michigan, New Mexico, North Dakota, Ohio, Pennsylvania and Utah have the lowest income tax rates, charging less than 5%, though the top income brackets may pay more in some locations.Social Security. Examine, too, whether your new state of residence taxes Social Security, even if you haven’t started collecting yet. According to Wolters Kluwer, 13 states tax some or all Social Security income. And most of these states exempt a part of this income based on adjusted gross income (AGI) thresholds or tax them at at a rate similar to the IRS: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.Retirement income. No matter whether you’re collecting a pension or plan to, no matter if you’re withdrawing money from your IRA or 401(k) now or plan to, check how the state taxes such income. Depending on location, retirement income can be tax-free, taxable, subject to exemptions and can even be dependent on retirement type (for example, teacher or military), Bourdon says.According to Wolters Kluwer, seven states do not tax individual retirement or other income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two states tax only dividend and interest income: New Hampshire and Tennessee. And four states exempt all or most retirement income: Illinois, Hawaii, Mississippi and Pennsylvania.By contrast, 27 states tax some, but not all, retirement or pension income, and many of these states limit the exemption amounts based on AGI thresholds, according to Wolters Kluwer.And seven states and the District of Columbia tax all or most private retirement or pension income: California, District of Columbia, Idaho, Minnesota, Nebraska, North Carolina, North Dakota and Vermont.When considering where to retire, you should go through your budget line by line.PIKSEL/Getty Images/iStockphotoOther types of taxes. Also take into consideration other types of taxes in the state to which you plan to relocate. That would include sales and use taxes, property taxes, estate taxes and fees.As Wolter Kluwer points out, high property taxes can be a burden for a retiree living on fixed income. And the states where the average amount of residential property taxes actually paid – expressed as a percentage of home value – is highest are New Jersey, Illinois and New Hampshire, according to the Tax Foundation. At the low end of the spectrum are Hawaii, Alabama, Louisiana and Wyoming.Many people are now considering retiring to states with lower taxes, especially with the $10,000 deduction limitation on state and local taxes, Westley says. “However, a hasty decision without factoring in the whole tax picture may leave you in a position where your overall tax savings are not so great. You may find that a certain state’s higher property and sales taxes are eating into your expected savings.”To be sure, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, deferral, refund or other benefits, according to Wolters Kluwer. So research whether you’ll get such a tax break on your property taxes before relocating.Westley also says moving to a state with an estate tax could reduce the amount that your beneficiaries inherit. You can find out which impose an estate tax on the Tax Foundation’s website.The bottom line: Once you understand a state’s particular taxes, you then have to determine how much you’d pay based on your unique income and expenses, Bourdon says. “For that, it helps to go through a budget line by line and determine how income tax, property tax and sales tax will vary. It’s a worthwhile exercise because, although there’s no free lunch, some will be more to your taste than others.”Evaluating how these taxes will affect your finances will require some time. One helpful resource is TopRetirement.com’s “Guide to the Best Places to Retire.”Virginia (15.1%)Florida (13.5%)Wyoming (10.3%)Pennsylvania (7%)Idaho (4.9%)Orlando, Florida (7.2%)Charlottesville, Virginia (4.8%)Waynesboro, Virginia (4.8%)Roanoke, Virginia (4.8%)Port St. Lucie, Florida (3.6%) Notice none of them is a major city. In fact, 26% of recent retirees moves were away from the city.Utah (17.3%)Maryland (12.3%)California (11.1%)Texas (9.9%)New Jersey (8.6%)×Have a state where you plan to move or retire? See what people think.Source: HireAHelper.com’s 2020 study ‘Where Do Americans Move When They Retire?’Robert Powell, CFP, is the editor of TheStreet’s Retirement Daily and contributes regularly to USA TODAY. Have questions about money? Email Bob at rpowell@allthingsretirement.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.Stories like this are possible because of our subscribers like you. Your support will allow us to continue to produce quality journalism.Stay up to date by signing up for one of our newsletters.Sign upPublished
12:04 pm UTC Apr. 25, 2021
Updated
2:20 pm UTC Apr. 25, 2021


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