For those living in the Northeast, the common practice is to move to Florida during your retirement years since there is no state income tax and the weather is warm. However, that’s not necessarily the best course of action for all retirees as their specific set of circumstances should play a large role in this decision. Which state should you retire in for tax purposes?
Evaluate states on how they tax retirement income
For the most part, Uncle Sam will be taxing your retirement income unless its held in a Roth IRA or below a certain income threshold. However, the same is not true at the state level. For instance, certain states exempt social security income and pension income. Even more, some states don’t tax a portion of your IRA or 401K withdrawals. It’s true that for most states, the income tax rate is usually in the single digit range, but it can surely add up as you withdraw tens of thousands of dollars each year to support yourself in retirement.
What else should I consider?
Please note that states that don’t have an income tax such as Florida, need to make up for that lost revenue. Typically, they have higher sales tax rates which for Florida is 6% and can be as high as 7.5% depending on the municipality. Don’t forget about property tax rates or taxes for passing on your wealth to your heirs. There are twenty two states with an estate or inheritance tax. The estate tax is based on the estate as a whole, while the inheritance tax is levied on each beneficiary.
Which states have no income tax?
The seven states that have completely no income tax are: Florida, Alaska, South Dakota, Nevada, Texas, Washington and Wyoming. Two other states that also have favorable tax laws are Tennessee and New Hampshire which only tax dividends and interest.
What about pension income?
If you worked for the government and have a public pension, these states don’t tax that income: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Mississippi, New York and Pennsylvania.
Bottom-line which are the most tax-friendly states for retirees?
It depends on your specific set of circumstances, but generally these states offer the greatest tax benefits to retirees: New Hampshire, Florida, Delaware, Texas, Arizona and South Carolina. Alaska would also make the list, but the lifestyle isn’t very conducive for many retirees. Please note that New Hampshire is often overlooked even though it is one of the only states with no income tax or sales tax.
More Questions? Browse Answers or ask your retirement planning tax questions online.
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