The first thing you must be aware of, is that I am not a tax professional. I have taken the time to research the tax issues set forth below, but you should do your own research and consult with qualified tax experts before making any decisions regarding finding a relative tax haven in the U.S.
That being said, the Federal tax rates do not very based on locality. However, each state has its own tax structure, which may be weighted either against retirees interests or treat retirees better tax wise than other states.
The tax structure in each state may include the following types of taxes:
1. Property Taxes;
2. Sales Taxes;
3. Income Taxes;
4. Estate/Inheritance Taxes;
5. Use/Specific Item Taxes;
Property taxes may be the biggest threat to retirees living on a fixed income, because they are based on the value of the property owned and bear no relationship to the annual income the retiree is receiving. They also are subject to reassessment which over time will increase the burden on a fixed income retiree. One strategy is to rent rather than own your home, but you have to remember that the rents will often reflect the property tax bill that your landlord is facing.
Sales taxes very greatly in the states that impose them, but a few states do not impose them at all. Income taxes also very widely, with some states giving retirees special tax breaks, and others taxing every category of income, including social security income. The category of estate and inheritance taxes sounds redundant, but some state define them in such a way that excludes either the defined “estate” taxes but impose “inheritance” taxes on defined categories of property, or visa versa.
Use/Specific Item Taxes are those taxes imposed on certain consumer items. These may include cigarett sales taxes, fuel sales taxes, alcohol sales taxes, and/or automobile registration fees with a vehicle value component. I have not researched or provided any information on these types of taxes, and you should consult your tax expert if any specific item or use applies to you personally.
Using information from the Tax Foundation, several sources have compiled lists of the “10 Most Tax-Friendly States For Retirees”, and the “10 Least Tax-Friendly States For Retirees.” They all seem to agree that Alaska is the most tax friendly state for retirees. However, they vary on the specific rankings on the top and bottom 10, depending on how they rate each category. The following is a good general list of top 10 and bottom 10. Each retiree should consult with local tax experts to fill out a list of the pros and cons of choosing each listed state they are considering as a retirement haven.
Top 10 Most Tax-Friendly States For Retirees:
1. Alaska: No State Income Tax; No State Sales Tax (Some cities impose sales taxes); No Estate/Inheritance Taxes; Property Taxes are assessed, however seniors over 65 get an exclusion of the first $150,000 of assessed value; In addition, residents get an annual dividend from the state’s oil reserves which is distributed to each permanent resident;
2. Nevada: No State Income Tax; Sales Tax at 6.85% plus some local additional sale taxes; No Estate/Inheritance Taxes; Property taxes are assessed, but are relatively low compared to other states; For the most part, the state relies on income produced from out of state tourists and gamblers rather than taxing its residents;
3. Wyoming: No State Income Tax; Sales Tax is 4% plus some local sales tax additions of up to 2%; No Estate/Inheritance Taxes are imposed; Property taxes are very low, with only 9.5% of market value being subject to tax;
4. Mississippi: State Income Tax is 3% to 5%, but exclusions are given for most retirement income; Sales Taxes are 7%; No Estate/Inheritance Taxes; Property taxes are relatively low and those 65 and older get an exemption of the first $75,000 of property value;
5. Georgia: State Income Taxes 1% to 6%, with good exemption for retirees; State Sales Taxes are 4%, with local increases of up to another 4%; No Estate/Inheritance Taxes; Property Taxes are at about the national average;
6. Alabama: State Income Taxes are 2% to 5%, with generous exemptions for seniors; Sales Taxes start at 4%, however local cities and counties can impose their own sales taxes, and can reach 10%; No Estate/Inheritance Taxes; Very Low Property Taxes with no state level property taxes for those over 65, however, some cities do assess property taxes on their own;
7. South Carolina: State Income Taxes are 3% to 7%, with good senior exemptions; State Sales Taxes 6%; No State Estate/Inheritance Tax; Property Taxes are very low, with additional exemptions for seniors; Sales Taxes However, are pretty high, 6% to start, with local governments adding up to 3%. Prescription drugs are exempted from sales taxes, but significantly, food sales are taxed;
8. Louisiana: State Income Taxes 2% to 6% with generous senior exemptions; Sales Taxes are 4% at the state level and local governments can add substantial amounts, with the statewide average being 8.86%; No Estate/Inheritance taxes; Property taxes are among the lowest in the country.
9. Delaware: Income taxes are 2.2% to 6.75% with good senior exemptions; No state sales taxes; Estate taxes are imposed, but no inheritance taxes; Property taxes are very low;
10. Pennsylvania: Income taxes are at a flat rate of 3.07%, and all retirement income is exempted; Sales Taxes are 6% with exemptions for food, clothing and medicine; No Estate Taxes, but Inheritance Tax is imposed against the heirs, and it can be a significant percentage of the inheritance; Property taxes are relatively high, especially near the larger cities.
The 10 Least Tax-Friendly Sates For Retirees Are:
1. Connecticut: Income Taxes 3% to 6.7% with only breaks for lower income seniors, and most retirement income is subject to taxation; Sale Taxes are 6.35% to 7 % for luxury items; There are Estate Taxes, but no Inheritance Taxes; Property Taxes are the second highest in the U.S., but 65 year olds and older can apply for tax credits and rent rebates;
2. Vermont: Income Taxes3.55% to 8.95% with almost no exemptions for retirees; Sales Tax 6%, with separate categories for prepared foods and restaurant meals at 9%, and alcohol served in restaurants at 10%; Estate Taxes are imposed, but there is no Inheritance Tax; Property Taxes rank in the highest 10 among the 50 states;
3. Rhode Island: Income Taxes are 3.75% to 5.99%, and retirees are not given any breaks as investment income is taxed at the full income tax rate with no preferential treatment for capital gains and dividends; Sales Taxes are 7%, with exemptions for food, prescriptions, nonprescription drugs, and some clothing; Property Taxes are high, being in the top 5 highest rates in the country, with only low income seniors being eligible for a small amount of relief;
4. Montana: Income Taxes are 1% to 6.9%, with the 6.9% rate being imposed on anyone or couple earning more than $16,000, with very little in the way of exemptions for retirees; Sales Taxes are the only bright spot, as Montana has not instituted a sales tax system; No Estate or Inheritance Taxes are imposed; Property Taxes are relatively high, with a modest tax credit being allowed to 62 year and older person with incomes less than $45,000 annually;
5. Minnesota: Income Taxes are 5.35% to 7.85% with no exemptions for retirees; Sales Tax is 6.875% plus local additions getting it up to as high as 9.53%, with food, clothing, prescription & nonprescription drugs exempt; Estate Taxes are imposed, but no Inheritance Taxes; Property Taxes are among the 20 highest in the country, with some newly enacted breaks and a “property tax deferral program” for lower income seniors who can defer paying a portion of their property tax bill which is then treated as a low-interest loan which eventually has to be paid off;
6. Nebraska: Income Taxes are 2.56% to 6.84% with no exemptions for social security income or out of state government pensions, and the top rate starts at the $27,000 level for individuals and $54,000 level for married couples; Sales Taxes are 5.5% with exemptions for food and prescription drugs; No Estate Taxes, but an Inheritance tax is imposed on transfers of property and annuities; Property taxes are assessed on 100% of fair market value with a senior exemption set at the state homestead exemption level;
7. Oregon: Income Taxes are 5% to 9.9%, the second highest in the nation, and most citizens are taxed at the highest rate, which is applied to all income over $7,950 for individuals and $15,900 for married couples. Social Security benefits are exempted, but other forms of retirement income are taxed, with a partial credit for those 62 and older with incomes below $22,500 for individuals and $45,000 for married couples; No Sales Taxes imposed; Estate Taxes are imposed on estates over $1,000,000, but no Inheritance Taxes;
8. California: Income Taxes are 1% to 10.3%, with only Social Security income being exempt for seniors but other forms of retirement income are not exempted, and the top rate starts for individuals at $48,942 and at $97,884 for married couples. Millionaires pay an additional 1% tax on income. Californians pay some of the highest income tax rates in the country; Sales Taxes are 7.25% and can reach 9.25% in some cities; No Estate or Inheritance Taxes; Property Taxes are assessed on 100% of market values, but are capped at 1% of assessed value with reassessment usually only on sale of the property or new construction;
9. New Jersey: Income Taxes are 1.4% to 8.97% with local taxes also imposed raising the rate to as high as 12% when property taxes are added in, the highest in the nation. The state ranks number 1 in both amount of property taxes paid and percentage of home value assessed. Social Security benefits and military pensions are exempted, and 62 or older residents with income under $100,000 get to exclude up to $15,00 for individuals and $20,000 for married couples; Sales Taxes are 7%, with groceries, medicines, and clothing exempted;
10. New York: Income Taxes are 4% to 8.82% for millionaires, with generous exemptions for retirees. even so, New Yorkers pay over 12% of their income in state and local taxes according to the Tax Foundation; Sales Taxes are 4%, but balloon to as high as 9% when local taxes are included. However, food and prescription & nonprescription drugs are exempted; Estate Taxes are imposed, but no Inheritance Taxes; Property Taxes are near the highest in the nation, but seniors 65 and older can qualify for reduced property taxes subject to overall income restrictions.
The morale of this story is: if you wish to move to reduce your overall cost of living, focus on the top 10 most tax friendly states listed above depending on your individual retirement fund structure, and always consult with tax professionals to make sure you are going to a tax friendly state under your personal circumstances.