Ah, retirement. A little golf. Some travel. Occasional visits from the grandkids. Taxes.
Yes, taxes. Even after you've traded in nine-to-five for more relaxing pursuits, you need to think about taxes. In fact, post-career tax considerations could be more crucial than ever, especially in deciding where to retire. From Alaska to Florida, state taxes vary considerably.
"The baby boomer generation is coming into retirement on the heels of one of the worst economic downturns in decades," says attorney Kathleen Thies, state tax analyst with CCH, a tax software and publishing company in Chicago. "What they have to pay in taxes can have a significant impact on their finances and overall cost of living in their retirement years."
But determining exactly how taxes might affect retirement is quite complex, says Holley Ulbrich, an economist and senior scholar at Clemson University's Strom Thurmond Institute in Clemson, S.C.
"Depending on one's income, housing choices and spending habits, the average tax burdens may not be relevant to a retirement decision," says Ulbrich.
Bankrate's state tax map provides a breakdown of the many types of taxes levied by individual states.
For most workers, income taxes are the major tax concern. So it's only natural that it's the tax that retirees also tend to think about first when picking a retirement home.
No problem, right? Nine states don't have an income tax. But before you call the moving van and change the mailing address for your pension checks, take a closer look.
Accounting for only a state's income tax structure is a little misleading.
"The general perception is that I'll move to a state like Florida with no income tax, and that will be a big benefit," says Thies. "But Florida has to make up its revenue somehow."
And in the majority of states and the District of Columbia that do collect some type of income tax, most provide retirees a break as well. They either don't tax Social Security or exempt the benefits, at least to the same extent as the federal government does.
Social Security and state taxes
- Social Security and state taxes
- 14 states tax at least a portion of Social Security benefits, usually based on the taxpayer's adjusted gross income.
States tend to be a little tougher when it comes to taxing private pension benefits. Most tax at least a portion of pension income. Of the states that tax income, only Pennsylvania and Mississippi completely exempt pension income.
Still, the state taxes might not be that bad.
"It depends on your income situation. I live in one of the states with an income tax, but (it) also is one of the most favorable in treatment of pension income," says Ulbrich. Her state doesn't tax Social Security and exempts a certain amount of pension income.
States that tax at least a portion of Social Security benefits:
|Kansas||New Mexico||West Virginia|
You also might want to stay put if you live in one of the five states that don't have a sales tax or your state and local sales tax rates are low. In the other 45 states and the District of Columbia, the recent trend has been to increase sales taxes.
Vertex, a Berwyn, Pa., firm that calculates sales tax rate changes, tallied 522 new or increased local, state and county sales tax rates in 2010, compared with just 33 decreases last year.