Now that you are close to retiring, you need to decide where you wish to spend your post-work life. Even if you have planned well and have plenty of financial resources at your disposal, you also realize that money doesn't go as far as it did years ago. Therefore, you need to find a place to live that has low tax rates and other benefits that will make your retirement much more secure from a financial standpoint. If you are ready to find your retirement haven, keep these common tax considerations in mind as you make your retirement destination choice.
State Income Taxes
If there is one tax that can have a huge impact on your retirement funds, it is state income tax. Since your goal is to keep as much of your retirement income as possible in your own pocket, it’s best to seek a retirement destination that offers a very low state income tax, or perhaps even no state income tax. Fortunately, they do exist. As an example, Wyoming offers residents no state income tax, while Kentucky, Mississippi, and Pennsylvania have state income taxes ranging between two and six percent.
Social Security Taxes
Along with having to pay little if any state income taxes, you also want to make sure that your new home also doesn’t have Social Security tax. In doing so, you can reap the full benefits associated with Social Security, which will also frees up more of your money from other sources as well. If this is of prime importance to you, also be aware that many states that offer retirees no Social Security tax are also very retiree-friendly when it comes to pensions and other retirement accounts.
Property Taxes
Whether you have decided to downsize during your retirement or have instead splurged on a luxury townhome or other property, always make sure you are aware of the property taxes that are in place at your preferred destination. Since these taxes can vary greatly from state-to-state, as well as how the values of properties are assessed, this is one type of tax planning error that could cost you thousands of extra dollars per year if you are not careful. If you are looking for an interesting twist on this type of tax, consider Mississippi. In this state, your home will be taxed at 10% of its assessed value. However, retirees are allowed to qualify for the Homestead Exemption, meaning your home's first $75,000 of assessed value will be tax-exempt.
Inheritance and Estate Taxes
If you have a large and valuable estate you want to leave to your family when you pass away, inheritance and estate taxes can quickly eat away at its value. Therefore, you want to look closely at these taxes before settling down in a new location. Currently, the District of Columbia and 12 states across the U.S. have estate taxes, while only four have an inheritance tax. This can be crucial if you are looking at Pennsylvania as your retirement destination, since the state's combination of estate and inheritance taxes is known to be high on estates that are valued at $5 million or more. Yet in Kentucky, it may be very different. In the Bluegrass State, an inheritance tax is in place, yet all members of your immediate family will be exempt from the duty, so keep this kind of thing in mind.
Healthcare Expenses Tax
Even if you are approaching retirement in good health, you know that eventually healthcare costs may become a concern following an injury or illness. Rather than find your retirement savings getting depleted by these costs, look for a place to retire that has low or no taxes on healthcare-related expenses. In more and more states, retirees can find tax exemptions on prescription drugs and other healthcare costs. In addition, you should always try to find a location that puts you in relatively close proximity to a hospital, since this will mean excellent medical care may be only minutes away.
Retirement Accounts
In addition to your Social Security, you of course have many other avenues of retirement income, such as an IRA, military pension, 401(k), and so forth. Because you have worked hard and planned well to build up these accounts, don't move somewhere and start letting taxes chip away at retirement income you are counting on to let you live a certain lifestyle. Fortunately, as the U.S. population has continued to get older over the past decade, more and more states have reduced or eliminated taxes on retirement accounts. For example, in Alabama, almost all types of public, private, and military pensions are exempt from taxes.
Sales Taxes
When you go to the grocery store and other stores to buy food and various other purchases, always pay attention to the sales taxes you are being charged. If you move to a location at retirement where these taxes are quite high, this will be one tax that is sure to take more and more money out of your pocket on a regular basis. Unfortunately, 45 states as well as D.C. collect sales taxes. As for the states that possess the highest combined local and state sales tax rates, these include Arkansas, Louisiana, Tennessee, Alabama, and Washington State.
Consider the Overall Picture
When you are looking for the perfect retirement destination, the truth is that you may not be able to find one that checks all the boxes regarding your taxes. For example, if you are wanting to retire to Myrtle Beach in South Carolina, you'll be glad to know the state has no Social Security tax and the fourth-lowest property tax rates in the nation. However, its state income tax rate is almost the highest in the country. Therefore, always consider the overall picture as it pertains to your finances, healthcare, and other areas before making a final decision.
With so many tax decisions to be made before you retire, now is the time to schedule a meeting with a trusted CPA to discuss these and other important tax matters.