Maybe you're thinking about relocating in retirement, in hopes of enjoying milder weather and lower expenses. Before you make a move, it pays to assess the overall tax burden of your future home.
No matter where you live, your federal taxes will be about the same. But you'd be amazed at how much your state and local tax burden may vary from one location to another. And if you itemize deductions, how much you pay -- and deduct -- in local property taxes could affect the bottom line of your federal return, too.
People searching for a retirement destination often just look at whether a state has an income tax. But higher sales and property taxes can "more than offset" the lack of a state income tax, says Tom Wetzel, president of the Retirement Living Information Center.
Seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- have no state income tax. New Hampshire and Tennessee tax only dividend and interest income that exceeds certain limits.
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.
Despite the dismal economy, there is one bright spot for retirees on the move: falling home prices.
"We see exceptional opportunities in some sought-after retirement destinations," says Mary Lu Abbott, editor of Where to Retire magazine. If you thought locations such as Naples, Fla., Scottsdale, Ariz., and Hilton Head, S.C., were out of your price range, take a second look. Property taxes, however, have not been moving down as quickly.
Here's a look at the other taxes you need to consider:
Pensions
Although most states that impose an income tax exempt at least a portion of pension income from taxation, they often treat public and private pensions differently.No tax on pension income: Ten states -- Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania -- exclude all federal, military and in-state government pensions from taxation. But Kansas taxes public pensions from all other states.
No tax on retirement income: Pennsylvania and Mississippi, by contrast, exempt all retirement income -- including distributions from IRAs and 401k plans.
Special breaks based on age or income:
- New Jersey allows residents 62 and older with incomes of $100,000 or less to exclude up to $20,000 of private-pension income from taxes.
- New York allows residents 59 1/2 and older to exclude up to $20,000 of private or out-of-state public pensions from taxes, regardless of their total income.
- In Michigan, individuals can exclude up to $43,440 of private-pension income ($86,880 for married couples) from state taxes for the 2009 tax year.
Continued: Where not to retire
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- State-by-state guide to taxes for retirees
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- Quiz: Test your retirement planning IQ
