Most of the headlines are about federal taxes, but you need to stay follow state and local taxes. This is where the big changes are being made, and they could be big enough to change where you want to live in retirement – or change your retirement spending plan.
The recession put many state and local governments deep in the red. Governments are cutting spending and raising taxes. Taxes and fees were increased in 29 states in 2009. Taxes on sales, income, and property are up in many states. Also rising are fees and specialty taxes (such as taxes on alcohol, tobacco and cigarettes).
Your tax bill will vary greatly based on where you choose to live. As we have advised in the past, look at the full range of taxes. States without income taxes, for example, sometimes load up sales and property taxes to boost their revenues. An even more important step is to look beyond the basic tax rates. Exemptions and exclusions could make your personal tax bill either much better or much worse than the basic rate would indicate.
Consider these factors before making a decision about how tax friendly a place is to retirees.
Income taxes. Two states without general income taxes impose taxes on dividend and interest income above certain levels. In New Hampshire and Tennessee some retirees are paying taxes on their income, though the states have no general income taxes. Be sure to look below the state level. Some states allow cities and other localities to impose separate income taxes.
In those states with income taxes, look for exemptions. Some “high tax” states are retiree tax havens because they exempt pension and Social Security income. Pennsylvania exempts all retirement income, including distributions from IRAs and 401(k)s. Most other states that exempt retirement income exempt only pension plan annuities. Some of them exempt only annuities paid to government retirees. California, Rhode Island, Vermont, Connecticut, and Nebraska fully tax retirement income, and the first three have high income tax rates.
Social Security benefits are not taxed at all in 35 states.
Property taxes. Almost every locality in the country is allowed to impose property taxes and does. Property taxes are based on the value of property, but don’t assume taxes have declined because real estate values have declined. Property tax rate increases are occurring across the country to preserve government revenues. New York and New Jersey have the highest real estate tax burdens, according to the Tax Foundation. New Hampshire, a state without a general income tax, has among the top five biggest real estate tax burdens.
Sales taxes. This is another tax that many states allow to be imposed by every level of government. Don’t rely only on quoted state-wide rates. You also have to delve into exemptions and exclusions. In some areas, food and prescription medicine are exempt, and many exempt services. Other states and localities tax everything you buy. The highest states sales tax is 8.25% in California.
Estate taxes. A state can have an estate tax, inheritance tax, or both, as we’ve discussed in past visits. These taxes are in 24 states, and almost all are imposed at lower levels then the federal estate tax.
The point is the total tax burden counts. Consider all the taxes. Also consider details, such as exclusions, exemptions, and deductions. In many states and localities next door neighbors with the same amount of income can have vastly different total tax burdens. One place to get a good look at the overall tax burden is www.taxfoundation.org.
This year and for the next few years you need to keep up with tax increases and potential increases. The status of a state as a retiree tax haven, or the opposite, likely will change for some. A good place to do your research is the web site www.RetirementLiving.com.
January 2010. RW
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