How Do Taxes Impact the Choice of Retirement Location?

Choosing a place to retire may be as simple as living near your children or as complex as finding a state that has the lowest taxes for seniors. High taxes imposed by states combined with city and county tax can make the difference in the quality of life for retirees. State and local taxes can amount to more than 10 percent of your income -- before federal income taxes take a share.

Considerations

Living where you are has some security, and you already know the tax structure, but moving to another location can be done with knowledge. Studies and figures are available to tell the retiree the tax impact of different locations. Locations that tax retirement benefits such as pensions and Social Security can make a difference to the retiree, but property taxes and sales tax are equally important.

Statistics

Federal taxes will be about the same in any state. The difference in taxation for retirees is in the state and local taxes. Seven states do not have an income tax in 2010, according to the Retirement Living website. These are Washington, Nevada, Wyoming, South Dakota, Texas, Florida and Alaska. Five states have no sales tax: Oregon, Montana, New Hampshire, Maryland and Alaska.

Identification

Property taxes are high in some states, but the lowest median real estate taxes are in Louisiana, West Virginia, Arizona, Alabama and New Mexico, according to Kiplinger. The majority of states do not tax Social Security benefits, but some are more pension-friendly than other states are. If you smoke, you may be interested in taxation of cigarettes; if you drive much, fuel taxes may make a difference.

Effects

Income taxes, sales taxes and real estate taxes make up a large percentage of state taxation on retirees. States in northeastern United States have the higher income taxes. This includes New York, Connecticut, New Jersey and Maryland. New Jersey also ranks high in sales tax, along with California, Indiana and Mississippi. New York, Connecticut, New Jersey and California are in the highest median real estate taxes. You may want to avoid these states when you retire, unless your income is substantially more than Social Security.

Gregor Macdonald at the Seeking Alpha website points to four reasons to avoid seven states for retirement. The states named have populations of more than eight million people, they are net importers of energy, they have more than 15 percent unemployment and each is borrowing heavily to pay unemployment claims. The seven states are New Jersey, California, Illinois, Michigan, Ohio, North Carolina and Florida.

Potential

The possibility exists that seniors can make location choices that affect the bottom line. Taxes can be a significant expense, and avoiding states with high taxes is smart. Other possibilities are in living outside city limits, as property taxes are often higher in town than in rural areas.

References

• Tax Foundation: Tax Data: State and Local Tax Burdens: All States, One Year 1977-2008
• TopRetirements.com: Baby Boomer Essential Retirement Links
• Seeking Alpha: Think the PIGS Are in Trouble? These 7 U.S. States Could Be Heading for Something Worse
• Retirement Living: Taxes by State
• Kiplinger: Retiree Tax Heavens (and Hells)