Taxes and where to live in retirement

<h2 style="text-align: left; color: #14a73c; font-size: 26px;">  Taxes and where to live in retirement   </h2>When retirement comes, many Americans relocate to another state. State and local taxes should factor into your decision if you’re contemplating such a move.

Income, property and sales tax

It might appear to be the best option to choose a state that has no personal income tax. However, once you think about property taxes and sales taxes, you might change your mind.

For example, let’s assume you have broken your decision down to two states: State 1 has a flat 5% individual income tax rate, and State 2 has no individual income tax. At first glance, State 2 may appear to be significantly less expensive from a tax perspective. What happens when you factor in other local and state taxes?

Let’s say the property tax rate in your preferred locality in State 2 is 5%, while it’s only 1% in your favored area in State 1. That difference could potentially cancel out any savings in state income taxes in State 2, depending on the assessed value of the home and your annual income.

Also, realize that the housing market can vary dramatically depending on where you live. So, if there are higher home values in State 2, there’s an even higher chance that State 2’s overall tax cost could be higher than State 1’s, despite State 2’s lack of income tax.

It can be harder to estimate the potential impact of sales tax, but it’s a good idea at the very least to look at the applicable rates in the various retirement locations you’re considering.

More to think about

If states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, tax interest and dividends but don’t tax wages. Others offer tax breaks for Social Security income and retirement plan.

In the past, the federal income tax deduction for income or sales tax and state and local property could help make up some of the difference between higher- and lower-tax states. However, with the Tax Cuts and Jobs Act (TCJA) restricting that deduction to $10,000 ($5,000 for married couples filing separately), will be less help from now through 2025, after which the limit is scheduled to expire.

There’s also estate tax to consider. The estate tax isn’t in all states, but when it is, it can be expensive. While under the TJCA the federal estate tax exemption has more than doubled from the 2017 level to $11.18 million for 2018, states aren’t necessarily keeping pace with the federal exemption. So, states could levy estate tax after a much lower exemption.

Choose wisely

As you decide where to live after you retire, it’s essential to factor in state and local taxes. However, if other factors are more important to you, you might decide on a state with higher taxes and you will have made an informed decision and will avoid unpleasant tax surprises. Contact us to learn more.

© 2018
Ben R Shull CPA LLC provides clients with tax, transaction, and advisory services. The insights and quality services we deliver help lead our clients through the next generation of changes, and accelerate growth while reducing risk. CPA Katy, TX.