One of my favorite economic concepts is that people respond to incentives. If a product you want is on sale, you’re much more likely to buy it than if it’s overpriced. Incentives also sway companies. Countries that offer corporations considerable tax breaks and other subsidies for opening a factory are more attractive locations than countries without such enticements.
Tax incentives are also part of the equation for individuals looking to relocate to another state in retirement.
Some states are friendlier than others when it comes to taxation. Seven states have zero state income tax. Thirteen states give retirees a break on their Social Security and pension income. So, it pays to do your homework before transplanting.
For instance, what if you are deciding between Florida and California for your post-career life? It would be smart to look at how much you stand to pay in taxes in each of these states.
Say you make $100,000 a year and you’re single. If you moved to Florida, you would pay a grand total of $0 state income tax on your income. Sweet! But, if you chose Cali as your new home, your marginal tax rate would be a hefty 9.30%, with an effective rate of 6.14%. So, you’d be looking at a state income tax bill of $6,140.
Now, say you’re a higher earner, bringing in $1,000,000. If you chose to move to the Golden State, you’d have a marginal tax rate of a whopping 12.3%, with an effective rate of 10.77%. Come tax time, you’d be writing a check to the state of California for over $100,000!
So, you see how income taxes can significantly impact your net income. I think it’s fair to say that during retirement, when you’re on a fixed income, this tax impact matters more than ever.
Consider moving to one of these tax-friendly states when you retire
If you’re considering a move to a new locale when you retire, take a look at this list of the seven states with no income tax, and the additional six that are also budget-friendly for retirees. (Spoiler alert – there’s a bonus state on there that you don’t want to miss!) These are places that people love to call home, with many of them offering stunning coastlines and beautiful interior spaces.
That means that 25% of this great country is offering sizable savings on your yearly tax bill. Who knows? You might just find your new home state!
Seven states with no state income tax
Does it get any more beautiful than the rugged wilderness and wildlife of Alaska? It’s arguably one of the prettiest states. It’s also the only state that has no income tax and no sales tax. But, homeowners should be aware that property taxes can be a bit hefty — the median amount in 2017 was $3,117.
The Sunshine State has become synonymous with retirement. And who wouldn’t want to live there? With gorgeous beaches (particularly those on the Gulf Coast), a mild climate and nearly year-long sun, Florida draws tourists and retirees alike. Florida is also attractive because it doesn’t have a state income tax, sales taxes are reasonable at 6%, and real estate taxes came in at a median of $1,752 in 2017.
If you love adventure and high-energy places, Nevada could be a perfect fit for you. There’s more to the state than Las Vegas, including the vast expanses of desert and opportunity for outdoor adventuring. Nevada won’t tax your income, and the sales tax rate is 6.85%, with a median real estate tax of just $1,489.
4. South Dakota
Roaming bison and vivid green plains harken you back to a simpler time in South Dakota. This state is gorgeous and filled with opportunity for adventure. With no income tax, you’ll breathe easier as you explore all the area has to offer. The sales tax is just 4.5%, and property taxes came in at only $2,012 on average in 2017.
Everything’s bigger in Texas — except the income tax. This state is thriving economically now, with oil production surpassing that of the entire countries of Iran and Iraq and a combined economy that would rank 11th in the world if Texas was a country. While there’s no state income tax, Texas does have a 6.25% sales tax and average property taxes of around $2,775.
6. Washington – With Microsoft and Starbucks, Seattle (and the rest of Washington) is anything but sleepless. This state offers residents stunning coastline, bustling cities and quaint country towns. Use what you save by not paying a state income tax to adventure through this varied landscape. There’s a 6.5% sales tax here, and real estate taxes averaged $2950 two years ago.
This state is my second home; I lived in Cody for many years. It’s hard to really describe all of the beauty this state has to offer, especially in the summer. Here, you’ll find a nice place to call your home with the added bonus of no state income tax. Property taxes here came in at around $1,250 in 2017, and the sales tax is a low 4%.
Six retirement income-friendly States
This state is about more than just football; Alabama is home to some of the prettiest coastlines the country has to offer. What’s more, retirees here get a sweet deal — the state doesn’t tax Social Security benefits or traditional pension payments. Sales taxes are a relatively low 4%, and real estate taxes averaged just $560 in 2017.
Who doesn’t love Chicago? It’s got the vibrancy of a great city and the quaintness of a European city. Outside the Windy City, Illinois is where the Great Lakes meet the Great Plains, creating a magical landscape. Here, retirees are allowed to subtract their Social Security income from their adjusted gross income (AGI). And, income from federally qualified pension plans and IRAs is exempt from state tax. Real estate taxes are relatively high, with a median of $4,157 in 2017, and the sales tax is 6.25%.
If you can put up with the humidity, Mississippi could be your retirement hot spot. With lots of shoreline and beautiful beaches, there’s more to this state than just BBQ and blues. There’s a low cost of living in the state, with real estate taxes ringing in at only $879 on average in 2017. Plus, pension, annuity payments and income from IRAs and Keogh plans are generally exempt from state tax here. And, Social Security benefits aren’t subject to taxation. Wow! There is, however, a relatively high sales tax of 7%, but with savings from your income tax, you’ll have some cushion when you go shopping.
4. New Hampshire
This state is the bedrock of colonial America and the era of the American Revolution. With this kind of history, the cobblestone streets and centuries-old architecture should come as no surprise. What may surprise you to know is that the only forms of income this state taxes are dividends and interest. And, there’s no state sales tax! But, living there isn’t cheap in every way – property taxes are among the highest in the country, with a median of $5,388 in 2017.
Ah, my native state. What’s not to love about Pennsylvania? You have two great cities – Philadelphia and Pittsburgh – with sprawling Amish country in between. Plus, the state is very friendly to retirees. Social Security benefits aren’t included in taxable income determinations, and distributions from 401(k)s and other retirement accounts, and IRA withdrawals taken after age 59½ are also typically exempt from state income tax. The sales tax is 6% here, and the median property tax bill in 2017 was $2,691.
The Volunteer State is made for music lovers. Nashville is the capital of country music and Memphis is home to the blues and Graceland. Retirees can make a good home here, too, with dividends and interest being the only forms of income subject to tax. What’s more is that low-income taxpayers age 65 or older are exempt. There is, however, a relatively high 7 percent sales tax, and homeowners paid a median of $1,120 in real estate taxes.
My current home state is on here as a bonus because it also has tax policies that favor retirees. Once you hit retirement age, Georgia won’t tax your Social Security retirement benefits. The state also provides a deduction of $65,000 per person on all types of retirement income for anyone 65 or older. Plus, the state’s sales tax rate and property tax rate are both relatively moderate. The median real estate tax payment in Georgia is $1,413 per year, and the state sales tax is 4%.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. The information contained in this piece is not considered investment advice or recommendation or an endorsement of any particular security. Further, the mention of any specific security is solely provided as an example for informational purposes only and should not be construed as a recommendation to buy or sell. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.