Should I Retire in A Lower Tax State?

| March 8, 2019 | 0 Comments

When considering how to plan for a comfortable retirement, taxes are a significant consideration. Taxes of all types are among the largest contributors to your cost of living during retirement, and cost of living can make the difference between a comfortable retirement and a meager one. What’s more, high state and local taxes have been a sore spot for many people since the December 2017 tax reform package severely limited how much of these you can deduct on your tax return.

Taxes come in many flavors
There are seven states in the U.S. that do not have a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. But it’s not necessarily cheaper to retire in those states. There are a number of other taxes that can affect your cost of living: local taxes, property taxes, sales taxes, and vehicle taxes. And then there are all those other taxes that go by deceptive handles like “fee” or “assessment.”

The taxes that have the greatest impact on most retirees are sales and property taxes. Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — do not have a statewide sales tax, though there may be local sales taxes.

The most tax friendly states for retirees
To be considered tax-friendly for retirees, a state should have a combination of low state and local income taxes, low sales taxes, and low property taxes. According to the Tax Foundation, the states with the best combination of low taxes are Alaska, South Dakota, and Wyoming. Popular retirement states like Florida, Nevada and Utah are also quite tax-friendly.

For retirees, taxes on social security benefits can have a big impact. Social security benefits are exempt from state income taxes in about half of the states in the U.S. Similarly, many states don’t tax pension income or retirement plan distributions. However, in those states, many individual cities, counties, or municipalities add their own income tax on social security and pensions.

It’s about more than taxes
When you compare the tax costs between states, the reduction in your cost of living can be dramatic. However, other things can affect your cost and quality of living as well.

Access to quality healthcare is the biggest factor for many retirees, especially as you grow older. Utilities and municipal services can also have a substantial effect on your cost and quality of living. For instance, while Alaska is quite tax-friendly, you may find the higher heating costs, snow and ice mitigation offset the tax savings.

A more subtle force on your cost of living is access to family and friends. If you move to a relatively distant location, you may spend more creating attractive accommodations for your (now) out-of-town guests. Or your travel costs may increase. Some retirees end up buying a second home closer to family when they begin to feel isolated in their idyllic retirement spot, creating a substantial increase in cost of living.

Moving to a tax-friendlier state
When paying less in state taxes is the goal, it’s important to clearly establish domicile in the state you’ve chosen. Most retirees won’t have trouble proving their domicile, simply because they will be residing in and spending most of their time in the state.

On the other hand, retirees who have lives and assets in more than one state may have a fight on their hands. You’ll need to take affirmative steps to demonstrate your new residence, like changing your voter registration, your church, your doctors, etc.

California’s high taxes are certainly a consideration when thinking about retirement. But then again, moving to Alaska isn’t for everyone either. Like anything, there are pros and cons to be weighed. A Certified Financial Planner® professional can help you measure the costs and benefits of moving or staying and clarify your goals so you can make an informed decision.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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