How to Pick a Retirement Location Based on Taxes
Choosing a place to retire is among life's big decisions. While a good climate, proximity to family and friends, and nearby recreational areas are all valid considerations, there is one very important item that should not be left out of your where-to-retire decision: taxes. While federal taxes are fairly consistent, there is a huge variation in local and state taxes. Here are some ways to find out if your chosen retirement location is tax-friendly or not.
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Instructions
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Look beyond income taxes. Many retirees make income taxes the primary consideration in choosing a retirement location. But the truth is, many states with low --- or no --- income tax more than make up for it in sales, property and other taxes. Based on income tax alone, Pennsylvania --- which does not tax retirement income --- would seem an ideal choice for retirement. But look closer and you'll see that the state's high property taxes and other local taxes put it dead last in a list of tax-friendly places to retire (see References).
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Consider what's important to you. According to the Nelson A. Rockefeller Institute of Government, state tax revenues during the second quarter of 2009 plunged more than 16 percent compared to the same quarter of the previous year. This was the sharpest decline since 1963. Under these circumstances, states will have to either raise other taxes or dramatically cut services. You may not want to live in a state that balances its budget by slashing funding for state parks and recreation, social services, education and cultural organizations.
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Consider your lifestyle. If you're a smoker, you'll want to avoid New York City, which has the highest tax on cigarettes. You'd do better in Michigan, where the cigarette tax is about half that of New York. If you're a military retiree, you should know that several states do not tax retired military income. It pays to find out which ones (see Reference 3). If you like cold weather sports and don't mind long, dark winters, you should definitely check out Juneau, Alaska. It ranks second on Kiplinger magazine's list of the best states for retirement, based on a combination of income, property and sales taxes. Dover, Delaware ranks first (see Reference 1).
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Check out websites and publications. There are many excellent books, magazines and websites that can help you decide which retirement location is best for you, based on its overall tax picture. A number of these resources are given below.
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Tips & Warnings
Start early. It can take years to find a retirement location that is both tax-friendly and appealing to you in other ways.
Check out the state you're living in first. You may be able to stay right where you are.
Don't rely on conventional choices. Arizona is a top choice among retirees. The weather is great most of the year, and property taxes are low, but there are sales and income taxes and other fees (such as high registration fees for recreational vehicles) that add to the cost of living there.
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