Retirement plans? Don't forget about state, local taxes.(Read article summary)
Retirement plans should include an appraisal of the impact of state and local taxes. Levies on income, benefits, property, purchases, and estate can make a difference in your retirement plans.
Erik Hill/The Anchorage Daily News/AP
Warm weather makes Florida a popular retirement destination ā but a lack of taxes on retirement benefits and estates makes it a smart destination too.
āAs more and more baby boomers are reaching retirement age, theyāll have many factors to consider in choosing where to live in retirement,ā saidĀ CCH, an international accounting company, in a report last week. āTaxes are one of the things they should consider when determining the costs of different areas they are looking at.ā
According to CCH, how much retirees pay in taxes can vary wildly depending on which state they chose to retire in. They found that five particular types of taxes can add up the mostā¦
1. State taxes on benefits from retirement plans
Seven states donāt tax individual income at all and therefore donāt tax retirement income eitherā¦
- South Dakota
Two states only tax income from dividends and interest:Ā New HampshireĀ andĀ Tennessee.Ā So while retirees in these states wonāt have to pay taxes on Social Security or pension benefits, they will still owe some taxes to the state if they own dividend-paying stocks or bonds, for example.
n the other 41 states and in Washington, D.C., taxes on Social Security and pension benefits vary. Some states exempt pension benefits or Social Security benefits while other states tax both. For details, check out CCHāsĀ state-by-state breakdownĀ of taxes on pension and Social Security benefits.
2. State income taxes
There are 41 states that tax income, and if you live or plan to retire in one of them, how much of your retirement benefits you could owe depends on that stateās tax rate.
Some states have a relatively low income tax rate across all brackets. The rate for even the highest tax bracket inĀ Arizona,Ā New Mexico, andĀ North Dakota, for example, is less than 5 percent. Some states ā for example,Ā IndianaĀ (3.4 percent) andĀ PennsylvaniaĀ (3.07 percent) ā have a relatively low flat tax rate.
But in other states, income tax is a double whammy: Not only is the tax rate for the highest bracket relatively high, the bar to qualify for the highest bracket is low. InĀ Arkansas, for example, any filer earning $33,200/year pays the highest bracketās rate of 7 percent. InĀ Maine, couples earning $40,700 and single filers earning $20,350 pay the highest bracketās rate of 8.5 percent.
3. Sales tax
Five states donāt have a sales tax, according to the FTA:Ā Alaska,Ā Delaware,Ā Montana,Ā New Hampshire, andĀ Oregon.
What types of goods sales tax applies to also varies from state to state. InĀ HawaiiĀ andĀ New Mexico, for example, doctor services are taxed. InĀ South Dakota, accountant and attorney services are taxed. Other goods and services taxed in some states but not others include barber services, landscaping, prescriptions, clothing, and food.
For details, check out theĀ FTAās state-by-state breakdown of sales tax rates, which also lists which states exempt food, prescriptions, and over-the-counter meds.
4. State and local property taxes
Because property taxes can be significant, CCH suggests learning not only an areaās current property tax rate, but also the history of how it has changed over time.
To learn more about a state or county, try this search engine formula:Ā [state/county] + state/county property tax. That should lead you to the applicable revenue departmentās website. HereāsĀ Florida, for example.
While reading up on a stateās property tax rates, donāt forget to check for tax breaks too. Some states and local jurisdictions offer some form of property tax exemption, credit, abatement, deferral, refund, or other benefit to senior homeowners or renters.
5. State estate tax
Wealthier retirees must also consider the estate tax of the state theyād like to retire in. If that state does tax estates, find out both the tax rate and what size estate the tax applies to.
To learn more about a state, try this search engine formula:Ā [state] + state estate tax. Again, that should lead you to the state revenue departmentās website. HereāsĀ FloridaĀ again ā where the estate tax was eliminated in 2004.
āĀ Karla Bowsher is a writer forĀ Money Talks News, a consumer/personal finance TV news feature that airs in about 80 cities as well as around the Web. This column first appeared in Money Talk News.