Smart SpendingSmart Spending

Taxes to watch out for in retirement

Moving to a low-tax state could significantly reduce your tax bill in retirement.

By Money Staff Aug 5, 2014 11:16AM

This post comes from Emily Brandon at partner site U.S. News & World Report.

U.S. News & World Report on MSN MoneyTaxes are likely to be one of your biggest bills in retirement, especially if you have done most of your saving in tax-deferred retirement accounts. But where you live plays a big role in the tax rate you pay on your retirement income.

 Couple on vacation © Image Source/SuperStock“Taxes are not the only thing that matters for retirement, but they can definitely have a sizable impact as people start to narrow down which states they are considering for retirement,” says Scott Drenkard, an economist for The Tax Foundation. “I think one of the driving reasons to move to Florida is because the weather is a lot nicer, and there’s no tax on income.”

Here are the taxes to consider as you select a place to retire.

Income tax

If your retirement income is high enough that you will owe taxes on it in retirement, you can reduce your tax burden if you move from a state with high income taxes to one without an income tax.

Seven states do not have an individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – tax dividend and interest income only. However, reducing your income tax bill isn’t a guarantee that your overall tax bill will decline.

“Before impulsively moving to a state without an income tax, though, the retiree should make sure he or she isn’t trading one tax for another,” says Twila Slesnick, co-author of “Nolo's Essential Retirement Tax Guide.” “For example, although Texas does not have an income tax, the average property tax rate in the state is quite high. You might find that you are paying more in property taxes in the new state than you were paying in income tax and property tax combined in the old state.”

Sales tax

Sales tax will typically apply to many of the purchases you make in retirement. There are five states without a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. California has the highest sales tax rate at 7.5 percent, and the state sales tax is 7 percent in Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.

“You should have a sense of where your dollars go so that you can determine how the sales tax structure of your target state will affect you,” Slesnick says. Also, local jurisdictions might add on an additional sales tax.

Property tax

You property tax bill is affected by many factors, including the state and neighborhood you select as well as the value of your home. Obviously, a small home in a less-expensive neighborhood can reduce your tax bill. Many states and some local jurisdictions also offer property tax exemptions, credits or rebates to senior-citizen homeowners who are above a certain age, have lived in their home a specific number of years or who are below a certain income level.

Taxes on retirement benefits

Some states give preferential tax treatment to Social Security and pension income. “There are a lot of states that will exempt or partially exempt Social Security income, and other states will exempt or partially exempt other types of retirement or pension income,” says Rocky Mengle, senior state tax analyst for Wolters Kluwer.

Most states don’t tax Social Security income, but 14 states do: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, New Jersey, North Dakota, Rhode Island, Vermont and West Virginia. Some states also exempt some pension or retirement account income for people above a certain age or whose adjusted gross income is below a certain amount.

“For a state that only taxes retirement income for people with a certain AGI, try to see if you are going to fit within that exception window,” Mengle says.

When selecting a place to retire, it is important to factor in all the types of taxes you might need to pay and the tax exemptions you might be newly eligible for.

“You have to balance all the tax aspects from a particular state and roll them all up to see what the tax burden will be and compare that from state to state,” Mengle says. “There are a lot of factors that go into deciding where to retire, and it’s difficult to say if the tax savings you have will outweigh distance from family members and other factors like that.”

More from U.S. News & World Report

Aug 5, 2014 2:14PM

At the federal level, some of your social security income can be taxable if your provisional income exceeds certain amounts.  Provisional income is 1/2 your SS receipts plus 401-k and regular IRA distributions , pensions and tax exempt bond income etc.   Please note the absence of ROTH IRAs 


ROTH IRA income is not included in the provisional income formula.  By using ROTH money strategically, one can reduce or eliminate taxes on Social Security distributions.



This is based on current law, which as we all subject to change

Aug 6, 2014 10:44AM

I retire next year and I'm moving back to Northern California...taxes OMG!

First of all yes they do have the highest sales tax, but the gurus never tell you that there are no sales taxes on food and drugs.(your first or second largest expense) 

The property taxes I will be paying will be around 32% less than my house in GA and 21% less than my townhouse in VA and they cap the assessed value at 1%, my townhouse's assessment jumped 21% this year, the GA property jumped 9%.

CA income tax also gives a nice credit and for a senior on a fixed income that is a big deal. No taxes on SSA.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.