Consider State Taxes When Planning Retirementby Tim Manni
If you’re planning on relocating for your retirement, be sure to consider more than just the local climate — make sure you consider each state’s, and even individual neighborhood’s, tax structure before moving.
Many retirees choose to settle down in a state that doesn’t charge any state income tax (those seven states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). Yet, retirement expert Tom Wetzel says a state’s other forms of taxation — mainly sales and property taxes — can sometimes offset the lack of state income tax:
Plus, in tough economic times, states without a personal income tax have fewer sources of revenue and are more likely to raise property or sales taxes and other fees to shore up their budgets. State tax revenues plunged nearly 12% during the first three months of 2009, the sharpest decline on record, reports the Nelson A. Rockefeller Institute of Government. And it may take states years to make up the shortfalls.
The decision of which state you wish to retire in ultimately comes down to your financial situation and personal preference. However, the experts at Kinglinger’s Personal Finance Magazine suggest avoiding some specific states that are particularly unfriendly to retirees in terms of taxes:
Three states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, they also have high top tax brackets: California (9.55% on income less than $1 million), Rhode Island (9.9%) and Vermont (9.5%).
Connecticut and Nebraska also fully tax retirement income, with top rates of 5% and 6.84%, respectively.
Be sure to continue reading the Kiplinger article (hat tip: MSN Money) in its entirety as it lists the states that offer special tax breaks based on income and age, are the most pension and Social Security friendly, and the states that offer the lowest sales and property taxes.