Selecting the Most Tax-Friendly Retirement State

MW-AZ297_retire_20130214114840_MESome of the largest expenses retirees encounter are taxes, so deciding where to live becomes problematic. Although there are lists of states with the lowest taxes, this is an oversimplification.

Kathleen Thies, a state tax analyst with CCH, a Wolters Kluwer business, cautions that states “that have high personal income-tax rates might have low property tax rates and states with low personal income-tax rates might have high property tax rates.”

“And so the end game for those looking to find the most tax-friendly state is to review all their sources of income in retirement including earned income, Social Security, pensions, and unearned income; all the different types of taxes they might face in retirement including personal income, sales, property and the like; and their overall tax burden,” Thies said in an interview.

One important red flag to be aware of is under-funded state and city pension funds which might lead to higher future taxes and/or fewer public services.

The Pew Charitable Trusts has two reports on the health of pensions for states and cities. “Connecticut, Illinois, Kentucky, and Rhode Island were the worst among the states, with pensions funded under 55% in 2010, according to one report. And in four cities—Charleston; Omaha; Portland, Oregon; and Providence, Rhode Island—pension systems were more poorly funded than those in Illinois, which at 51% was the lowest-funded state, according to another Pew report.”

Certain states are announcing changes in income tax to retirement plans, including Georgia, Kentucky, Maine and Michigan. For instance, Thies notes that “decreasing personal income-tax rates and increasing sales tax rates is a way to relieve the burden on the income tax side and put more money in the pockets of consumer in hopes of stimulating the economy. It’s a way of collecting taxes tax on the back end.” She sees this as an emerging trend. just published Part 1 of “Finding Your Most Tax-Friendly State for Retirement.” It concisely lays out categories such as “Major Taxes in Retirement,” ” Property Tax” and “Distribution of  401k and IRAs” with states highlighted under each.

Thies notes that people rarely base their retirement choice solely on taxes. Proximity to family and friends, climate, culture, employment opportunities, transportation and outdoor activities are major determinants. Choosing one’s retirement area is a labyrinthine process.


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