Retirement Relocation in Tax Friendly States Lockhart TX

With many of us baby boomers increasingly worried about their finances in retirement, reducing what we pay in taxes is an attractive option. It’s one option that might not impact our lifestyles in any way. So, if you already live in a high tax state, voting with your feet to escape some of those taxes might be a good idea.

The principal state taxes you typically face in retirement are income, property, and sales taxes. Gasoline, cigarette, and estate taxes certainly exist, but they probably won’t be deal breakers for most people.

The various states that have income taxes differ considerably on how they treat social security benefits and pensions. Your particular situation could have a significant impact on the taxes you pay. For example, if you will get a large military pension you might want to consider a state that considers that income exempt. Some states tax social security (or part of it), and some do not. A few states only tax out of state pensions, while others give exemptions for some government pensions. Many states have a wide variety of exemptions for veterans, people over 65, etc. In some cases those could be big factors. The trick is to research the states you are considering, and know the tax situation before you move. For more specifics about which states tax what kinds of benefits, see Most Tax-Friendly States for Retirement .

Property tax is often the largest tax that retirees pay, so that factor is definitely worth considering in deciding where to live. States like Florida, California, and Arizona have programs that limit how much the appraised value of full time residents’ home can go up, which can be a very important protection. On the downside, these states are now having problems raising enough revenue, so who knows what might happen in their future fiscal troubles.

Income Taxes
These states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income.

Sales Taxes
Alaska, Delaware, Montana, New Hampshire, and Oregon do not have any sales taxes. Note that in the states that do have sales taxes, local municipalities often have the right (and do) charge additional city sales tax.

State Tax Burden
The Tax Foundation reports on and ranks each state for its tax burden. You can find the entire list at the Tax Foundation Research .

Not the Only Consideration
A word of caution. Taxes should not be the tail that wags the dog. Being close to family should be a lot more important, as is the type of community and environment you want to live in. You can always change other factors to make ends meet: you can take a part-time job, move to a smaller or less fancy house, or move to a lower cost state.

More Help
Kiplingers has a terrific article on tax-friendly states at Yahoo Finance, along with many other factors you should consider about state taxes and your decision to move.
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A surprising number of people list " tax-friendly state " as one of their most important criteria for selecting a retirement destination. While we think it is only one of many important considerations, all other things being equal, paying lower taxes might make the difference between a fulfilling retirement and a stressful one.  States in the northeast are notorious for being heavy taxers; many of them are losing long-time residents who want to escape those tax burdens.

The major taxes you face in retirement are: property taxes, income taxes, sales taxes, and the taxation of pensions and social security. Remember that a low tax rate in one area could be negated by another type of tax. You should also be concerned about differences within a state - sales, income, and property taxes can differ dramatically among cities in the same state.

Income Taxes. There are 7 states that have no income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

Tennessee and New Hampshire only tax certain amounts of dividend and interest income.

Sales Tax. There are big differences between states, with some charging none at all (Alaska, Delaware, Montana, New Hampshire, and Oregon) - while others have whopping tax rates. Some states exempt food and clothing, others do not. Many municipalities, such as New York City, tack on their own sales tax. Sales taxes are usually the smallest tax concern for retirees,unless you plan on making a lot of a major purchases like cars or boats.

Property Tax. For most retirees the property tax is the enemy. These taxes are based on the worth of your home, and bear no relation to your income or ability to pay. In general many, but not all, southern states have low property taxes, whereas the old industrial states of the northeast and midewest tend to have high property taxes. Alabama has the lowest ($328) and New Jersey the highest ($5,773) property taxes in 2006 (but remember, NJ homes are usually worth a lot more than those in AL).  Florida has a helpful homestead law which permits full-time residents over 65 to pay only a small annual increase in property tax each year. Other states or municipalities have various tax abatement or tax freeze programs for seniors, which can be extremely valuable.  Check with your state and municipal departments of taxation to find out more about the states and towns you are considering. The Tax Foundation has some good state property tax information . Or, read John Brady's NY Time's Op-Ed piece, " It's Time to Retire the Property Tax ".

Taxation of Pensions. For many retirees the taxation of pensions is a very important consideration when thinking about selecting a retirement state. This is particularly true if you are going to receive a pension, especially a government or military one. Topretirements has  some more information about taxation of pensions .

Most Tax-Friendly Towns.   Topretirements reported on the US News 2008...

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