taxes

Picking the perfect retirement tax haven

The company also found that last year's average U.S. combined sales tax rate, that is, the total of state, county, local and special purpose tax district collections, was 9.64 percent. That's a full percentage point higher than in 2009, and it is the highest sales tax rate Vertex has recorded since it began its annual calculations in 1982.

Retirees living on fixed incomes are particularly hard hit by sales taxes because they are regressive. A regressive tax effectively means that lower-income individuals pay a greater proportion of their income than higher-income groups pay.

In order to ease the regressive nature of sales taxes, many states exempt certain products, such as food, from the tax. But to make up for such nontaxable goods, states might opt to collect on other things, such as services.

"Older persons are more likely to consume services," says Ulbrich. "They need more help with things such as landscaping and household upkeep."

Property taxes

Property taxes also are a major source of revenue. The largest base here is real estate taxes, which are driven locally, usually at the county level to pay for schools, so you have to be aware of your area, says Thies.

Overall, though, says Thies, real property taxes have gone up even though the economy has stagnated.

No worries. You're selling the big family home and renting in a senior community so property taxes won't be a problem, right? That depends.

Several states have classified property tax structures, says Ulbrich, meaning that tax collectors have found more to target than just real estate. "Property taxes are collected in many places -- on boats, cars and other motor vehicles -- and it might be relatively high," she says.

So check out a state's and its local jurisdictions' property tax systems before you head to that lakeside retreat with that big, and potentially tax-costly, fishing boat.

Estate taxes

Finally, don't forget the ultimate collection: estate taxes.

The Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the federal estate tax in 2010. It was reinstated in 2011 and will be in effect at a maximum tax rate of 35 percent on estates worth more than $5 million through 2012.

As the estate tax was phased out, it cost the state treasuries that piggybacked their collections on the federal law. Some states, however, were unwilling to forgo this revenue source and decoupled from the federal law, thereby retaining or reinstating their estate taxes. Most of these states also impose the tax on much smaller estates than the federal law does.

States that impose estate taxes:
ConnecticutMarylandOhio
DelawareMassachusettsOregon
District of ColumbiaMinnesotaRhode Island
HawaiiNew JerseyVermont
IllinoisNew YorkWashington
MaineNorth Carolina
Source: McGuireWoods

The current federal estate tax law expires again at the end of 2012. Legislatures in many states are waiting for Washington, D.C., to take presumably final action on the federal law before they move on their estate taxes, says Thies.

Some states also impose an inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska (county level), New Jersey, Pennsylvania and Tennessee. While an estate tax is collected on the assets left by a decedent, an inheritance tax is imposed on assets a beneficiary receives.

If you choose to retire in a state with an estate or inheritance tax or both, you should get the advice of an estate specialist so you can arrange your assets and enjoy your retirement without worrying about its eventual tax cost to your family.

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