By Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
I grew up in Pennsylvania and love the change of seasons, but I am getting very anxious for the summer weather to arrive especially after our brutal winter.
A few weeks ago, I wrote an article on annual tax returns and the shifting focus from tax deductions to controlling taxable income. I try to rotate between different topics, but I am breaking that cycle and talking about taxes again today. Instead of Federal taxes, let’s look at state taxes in several different areas.
Occasionally when folks retire, they explore moving to other states for various reasons. Here are some of the common reasons:
- Climate and weather – avoiding the winters for the comfort of warmer locales all year round.
- Grandchildren – living closer to kids with a growing family so they can be present in their grandchildren’s lives and activities.
- Lifestyle and activities – golf, beaches, hiking, cultural events, or active adult communities.
- Healthcare access – access to high-quality hospitals, specialists, and senior care facilities.
- Estate and legacy planning – some states are more favorable for estate or inheritance taxes, and this can be appealing to higher net worth retirees.
While cost of living and taxes can be viewed separately, they often go hand in hand. These are the two factors I hear about most from individuals trying to stretch their dollars in retirement. Many choose to sell their home and purchase a smaller house or townhome in another state. However, even with a lower mortgage payment, additional expenses and taxes can quickly erode that advantage.
When retirees or soon-to-be retirees are considering relocating to another state, it’s important to keep the following costs in mind:
- Will I pay state tax on retirement account withdrawals?
- Will my pension payments be taxed in that state?
- Will my Social Security payments be taxed in that state?
- Are the sales taxes higher or lower than my current state?
- Are the property taxes higher or lower than my current state?
The following states are the most favorable for retirees as they do not tax retirement accounts, pensions, or Social Security: AL, FL, IL, MS, NV, NH, PA, TN, TX, WA, and WY. On the flip side, these states will tax all three: MN, MT, NM, and VT.
Find the complete listing of all 50 states here.
Cost-conscious retirees should also consider state sales taxes and property taxes.
- There are no state sales taxes in AL, DE, MT, NH, and OR.
- The highest state taxes are IN, MS, RI, and TN at 7% and CA at 7.25%.
- Property taxes range from .27% to 2.23%, with the 10 lowest states being HI, AL, CO, NV, LA, SC, DE, WY, WV, and AR. The 10 highest are NJ, IL, CT, VT, WI, TX, NE, PA, OH, NY, IA, and KS.
Find the complete listing of all 50 states here.
The bottom line is the best state, or states, for a retiree will depend on what matters most to that retiree. Here is a quick synopsis depending on your retirement focus and goals:
- Lowest taxes – Florida, Tennessee, Texas, Wyoming, South Dakota, Nevada, New Hampshire
- Low cost of living – Mississippi, Alabama, Arkansas, Oklahoma, West Virginia, Tennessee
- Balanced tax + affordability – Tennessee, South Dakota, Wyoming, Florida, Pennsylvania
- Healthcare/quality of life – Minnesota, Colorado, New Hampshire, Maine, Vermont
- Warm weather retirement – Florida, South Carolina, Tennessee, Arizona, Georgia
It’s easy to be drawn to warmer weather and lower taxes, and in many cases, that move can make sense. But the real question isn’t “Which state is cheapest?” but rather “Which state gives me the best overall outcome for how I want to live?”
That’s where thoughtful planning can make all the difference.
Enjoy your weekend!
Rob