Many retirees are surprised to find that tax planning remains important even when they enter retirement. In fact, for some retirees who have stopped working full time, giving sufficient thought to their tax situation is at least as important (and in some respects is even more important) than it was prior to retiring.
This is due in no small part to the fact that different states have sometimes vastly different methods for taxing (or not taxing) their residents. Because these differences can sometimes be significant, it’s not uncommon for perspective or near retirees to move to a new state largely for reasons of saving on their annual tax bill. With that in mind, here is a brief survey of some of the most tax friendly states for retirees.
Alaska: Alaska has long been a preferred retirement destination for some, in large measure because the state imposes no tax whatsoever on individual income, and has no statewide sales or use taxes.
Florida, Nevada, South Dakota, Texas, Washington and Wyoming: As with Alaska, these six states are currently free from income tax. These states do, however, have sales taxes of varying levels.
Tennessee and New Hampshire: Neither Tennessee nor New Hampshire as a general statewide income tax, although they do tax dividend and interest income that exceeds certain thresholds. Depending on the composition of your retirement portfolio, and how you plan to fund your retirement years, Tennessee and New Hampshire may or may not be a good low tax option. Furthermore, as with most other states that have no general income tax burden, sales tax rates are relatively high.
Other Financial Considerations. One mistake that some retirees make when considering moving to another state to lessen their tax bill is focusing solely on the applicable income tax levels. We briefly mentioned that sales taxes can vary widely, but there are other tax considerations as well. For example, local property tax levels can vary widely from state to state, and even within a particular state. If you plan to purchase the residence you’ll be living in during retirement, your annual property tax bill may be at least as important as your income tax burden, and you need to plan accordingly.
Of course, the list above represents the current status of tax laws in these various states, and state laws can (and do) change over time. While it may be sound financial practice to let your prospective tax burden play a large role in your retirement planning, it may be unwise to let that be the only thing you consider. That state’s tax structure may change, and there can be significant costs associated with moving to a new state. Look to balance your financial and nonfinancial reasons for choosing a particular retirement destination so that if your tax bill increases you’ll still be happy with your decision.