Forget what you know about withdrawal rates. The key to making your nest egg last is to spend less money than you earn.
Due to state tax law differences, however, you'll soon learn that where you live during retirement largely dictates what you spend.
Some states, such as Minnesota and Vermont, impose a hefty tax on retirement income, while California's top income tax rate is a budget busting 13.3 percent. Others, including New Jersey, have the highest property tax rate in the nation, while 14 states tax Social Security benefits either in part or in full. They are: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Not all, though, made our list of least tax friendly states for retirees.)
Also, the sheer size of the aging baby boomer population has encouraged most states to consider more tax-favorable legislation for seniors, said Kathleen Thies, state tax analyst for CCH tax services firm in Riverwoods, Ill. And some relief programs have already been enacted.
But due to their combination of taxes on ordinary income, pensions, real estate, inherited property and estates, the following 10 states can best be described as hostile territory for retirees.
The list was culled with data collected from CCH, the Tax Foundation, state revenue departments, retirementliving.com and the Federation of Tax Administrators. (Property tax rates, compiled by the Tax Foundation using Census Bureau data, are through calendar year 2011 and reflect the mean property tax as a percentage of mean home value.)
And because tax laws impact retirees differently, depending on their financial circumstances, we did not attempt to rank each state in terms of tax friendliness—or lack thereof. The states are instead presented in alphabetical order.
State income tax: 1% - 13.3%
State sales tax: 7.5% (combined state, local rate)
Mean property tax rate as a percentage of mean home value: 0.8%
Property tax ranking: 33
Estate tax: Limited to the federal estate tax collection rate
Inheritance tax: None
The sunny skies of California may be a playground for movie stars and millionaires, but retired residents should take their money and run.
The so-called Golden State, where fortune cookies, blue jeans and Apple computers were invented, levies one of the nation's highest personal income tax rates. Its tax exemption for Social Security benefits is little comfort, given that most other retirement income gets taxed in full.
And property taxes are assessed at 100 percent of the home's value, up to a maximum of 1 percent of the home's cash value. That can deliver a serious dent to your standard of living. Median home prices for new and existing houses and condominiums reached $340,000, with high real estate prices in cities including San Francisco, Los Angeles and San Diego.
State income tax: 3% - 6.7%
State sales tax: 6.3%
Mean property tax rate as a percentage of mean home value: 1.49%
Property tax ranking: 10
Estate tax: 7.2% - 12%, exemption amount $2 million
Inheritance tax: None
This commuter haven for New York's business elite may be famous for Yale University and its maritime past, but the Constitution State doesn't cut seniors any slack—especially those of means.
Indeed, Connecticut levies a progressive estate tax of up to 12 percent beyond the $2 million exemption. It also taxes pension benefits, and is one of only 14 states that tax Social Security income. Seniors looking to stretch their hard-earned savings further might do well to cast a wider net.
State income tax: 0.36% - 8.98%
State sales tax: 6% (but local taxes can add up to 2% more)
Mean property tax rate as a percentage of mean home value: 1.36%
Property tax ranking: 14
Estate tax: None
Inheritance tax: 5% - 15%, depending on amount, relationship of the heir to the decedent.
The Hawkeye State is fertile ground for farming, but it also harvests tax revenue from every available source.
Its personal income tax rate tops out at a punishing 8.98 percent, while inherited property is taxed at a maximum rate of 15 percent. Retirement income is also partially taxed, but married taxpayers age 55 or older may exclude from up to $12,000 ($6,000 for single filers) of pension benefits and other retirement pay.
Relief on some fronts, however, is already in sight. The heartland state is phasing out its tax on Social Security income by 2014, and lawmakers this year approved a property tax cut to the tune of $4.4 billion over the next 10 years—agricultural and residential property tax payers will save an estimated $500 million annually by the 10th year. On balance, however, Iowa still leaves most seniors with a bigger tax bill than they bargained for.
State income tax: 2% - 8.5%
State sales tax: 5%
Mean property tax rate as a percentage of mean home value: 1.11%
Property tax ranking: 18
Estate tax: 8.0% - 12%, with a $2 million exemption
Inheritance tax: None
Maine is long on lobsters and lakefront cabins, but short on tax breaks. The Pine Tree state has a whopping 8.5 percent top marginal income tax rate, and hefty property taxes to boot.
Maine also hits wealthy retirees hard, taxing estates over $2 million up to 12 percent. Seniors may deduct up to $6,000 per taxpayer ($10,000 after 2013) of all pension annuities, and retirement plan income included as federal adjusted gross income, but that amount is reduced by any Social Security and Railroad Retirement benefits they receive.
State income tax: 2.46% - 6.84%
State sales tax: 5.5%
Mean property tax rate as a percentage of mean home value: 1.72%
Property tax ranking: 6
Estate tax: None
Inheritance tax: 1% for immediate relatives with a $40,000 exemption, 13% for remote relatives with a $15,000 exemption, and 18% for all others, with a $10,000 exemption. Spouses are exempt.
The Cornhusker State, famous for fossil beds and historic trails (Pony Express, Lewis & Clark and Oregon), not to mention Omaha Steaks, is phasing out its inheritance tax over the next nine years, but still takes a piece of Social Security benefits.
Property taxes, assessed at 100 percent of actual market value, are also among the nation's highest, but homestead exemptions exist for those 65 and older based on income. Married couples with household income of up to $31,000.99, for example, are 100 percent exempt, while those making $39,301 or more get no exemption.
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