BOSTON — There’s plenty to consider when you contemplate where to live in retirement. Will family and friends be nearby? Does the weather suit you? What sort of activities are there? And especially high on the list of factors to consider are taxes — one of life’s two certainties and one of the largest expenses people face in retirement.
Is the state that you have designs on retiring to tax friendly or not? And the basic questions to answer are these: How does the state tax your income? How does it tax your property and your consumption? And what’s the overall tax burden?
As some know, older Americans tend to generate income from several sources in retirement, including income from wages or self-employment; Social Security; pensions; and personal assets, including taxable and tax-deferred accounts. Taxes on those sources of income, in essence, mean less money in your pocket for your golden years. So before moving to this or that state, you’ll need to figure out whether and how the state taxes your various sources of income.
You will also need to consider taxes on the other side of the ledger, including state and local property taxes, state and local sales and use taxes. If you live large, you might pay plenty in property taxes and sales taxes.
And, then you’ll need to calculate what your overall personal tax burden will be. It’s a taxing exercise to be sure.
Thankfully, CCH, a Wolters Kluwer company, has created several charts and tables that look at how states tax income, sales and other transactions, including retirement income. We’ve culled from that list — with the help of Kathleen Thies, a state tax analyst for CCH — the top income-tax friendly states for retirees, states that don’t tax income, including Social Security and pension income. And then we added some commentary from the Tax Foundation about other taxes, such as property and sales, and the overall tax burden, in those income-tax friendly states.
Of course, before moving to one of these income-tax friendly states, be sure to calculate your personal overall tax burden given all your actual and likely sources of income, given your spending patterns, and given your actual or desired standard of living.
Remember, what you save on income taxes in one state you might pay in property taxes or sales taxes. And vice versa. What you save on property and sales taxes in one state you might pay in income taxes. “There are no free lunches so you need to be savvy about what your particular needs are in retirement,” said Thies.
One more note, for those who itemize deductions, there are five types of deductible non-business taxes, including state, local and foreign income taxes; state, local and foreign real estate taxes; state, and local personal property taxes; state and local sales taxes, and qualified motor vehicle taxes.
In other words, to calculate your overall personal tax burden, you’ll have to figure out whether you can take advantage of these deductions.
That said, here’s a closer look at the states that are — if nothing else — the friendliest for income tax purposes, and, in some cases, fairly friendly from an overall tax burden, based on CCH and the Tax Foundation research. The states are listed in order of tax friendliness from an overall tax burden point of view, as measured by the Tax Foundation.
1. Alaska: Alaska might not seem like a retirement haven based on the usual factors considered such as, say, weather. But it might be the perfect place for one’s golden years if taxes are a big concern. Alaska doesn’t tax personal income, including Social Security benefits and pension income. And, there’s no state-imposed sales tax. This is not to say that you won’t pay any taxes in Alaska. Instead, it means that you’ll pay other types of taxes, such as property taxes.
2. Nevada: Many retirees rely on income from several sources to make ends meet these days. If you fall into that camp, Nevada might be the place for you. This state doesn’t tax income, Social Security benefits or pension income. And its property taxes are reasonable, too. Its sales tax, however, is higher than the national average.
3. South Dakota: It might not be the first or even the second state that you think of when contemplating where to live in retirement. But South Dakota is nothing if not a tax friendly state. The state doesn’t tax individual income, Social Security benefits or pension income. And the overall tax burden is among the lowest in the nation.
4. Wyoming: There’s no individual income tax on Social Security benefits or pension income in Wyoming, according to CCH. But that’s not to say you won’t have to pay any taxes in Wyoming. Property taxes and sales taxes tend to be higher than the national average.
5. Texas: In Texas, there’s no individual income tax. But property and sales taxes tend to be higher than the rest of the nation.
6. Florida: There are plenty of reasons why people choose to retire to the Sunshine state, the low tax burden being among those reasons. There’s no individual income tax on Social Security benefits or pension income. There are pipers to pay, however, in the forms of property and sales taxes.
7. Washington: Another state not generally viewed as a traditional retirement haven is, however, income tax friendly for retirees. There’s no individual income tax on Social Security benefits or pension income. But if you plan on spending lots money while in retirement, Washington might not be your first choice. It has a relatively high sales tax.
See the slide show for complete information on all the states.