Few people realize that taxes are one of the largest expenses in most retirement budgets. It’s not only the federal income tax you should be concerned about but the full range of state, local, and federal taxes. The state and local taxes vary considerably. Also, some areas give tax breaks to the silver set, while others don’t. In fact, some states are unfriendly to the “unearned” income retirees typically live on, and retirees in those states could face higher tax burdens than they did before retirement.
Kiplinger recently did a survey of how states tax retirees. Instead of showing the states you should consider for retirement benefits, the article lists 10 states to avoid in retirement, places it refers to as “tax hells.” The worst is Vermont. It’s followed by Minnesota, Nebraska, Oregon, California, Maine, Iowa, Wisconsin, New Jersey, and Connecticut. But you need to look beyond this list and look to the details of state and local tax law and your income and spending. For example:
Connecticut can be inhospitable to retirees, depending on their income and where they earned their retirement benefits. Although some residents of the Constitution State can exclude their Social Security benefits from state income taxes, the exclusion applies only if their adjusted gross income is $50,000 or less ($60,000 or less for married couples). All out-of-state government and civil-service retirement pensions are fully taxed. Effective July 1, 2011, the sales tax rate statewide is 6.35%, with luxury items taxed at 7%. Connecticut residents pay some of the highest property taxes in the U.S., according to the Tax Foundation, but residents 65 and older qualify for an annual property tax credit or rent rebate.