When preparing for retirement — especially if contemplating a move to another state — it’s crucial to research the tax implications. Make sure your search is comprehensive, including state and local taxes on income, property, and consumer sales purchases, because different states take different approaches to taxing their residents. Also check for tax breaks specifically for senior citizens.
Income taxes. it’s worth noting that seven states tax neither earned nor retirement income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. The rest of the states are a mixed bag. Some have no income tax on earned income, but do tax retirement income. Several states exempt or credit, at least partially, retirement income, including Social Security. Some states only tax interest and dividend income.
Sales taxes. Five states don’t charge a sales taxes: Alaska, Delaware, Montana, New Hampshire and Oregon. The remaining states have some combination of state and local sales taxes. For example, a state may levy a 6 percent tax on consumer purchases while certain cities within the state add a 1.5 percent tax, bringing the total tax rate in that area to 7.5 percent. Some states exempt food and medicines from sales tax.
Property taxes. Every state levies property taxes on real estate. Those taxes currently range from 0.27 percent on assessed value in Hawaii to 2.35 percent in New Jersey. It helps that property taxes are deductible on your federal income tax return (with some qualifications). Some states cap home valuation or provide some other break on property taxes beginning at age 65.
Vehicle taxes. Half the states do not tax vehicles. Rates in those states that do tax vehicles range from 0.10 percent in Louisiana to a stiff 4.77 percent in Rhode Island.
Estate and inheritance taxes. Six states levy inheritance taxes and fifteen collect estate taxes. Maryland and New Jersey collect both. Estate taxes apply to the overall estate of the deceased. Inheritance taxes are imposed individually on each person. Estate taxes are paid out of the assets of the estate, whereas the individual receiving an inheritance pays that tax personally. Well-planned estates may pay inheritance taxes for heirs out of the estate. Surviving spouses are exempt from inheritance taxes. Don’t forget that these are in addition to federal estate taxes.
Taxes by another name. State and local governments charge many fees, such as annual vehicle registration fees, driver’s license renewal fees, environmental fees on utility bills and toll charges on highways. They all add up and must be considered for retirees on a fixed income.
Adding things up. Kiplinger has a handy “at a glance” tool that sorts the states by tax friendliness, which you can see here.