State taxes and retirement move...how important? (friendly, communities, social security)
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If you moved to another state in retirement (or are also considering a move), how important of a factor was the income tax tax rate to where you moved?
Not very important at all. A factor, but a minor one. I don't plan to be a big spender in retirement, slowly sipping at IRAs over SS so I shouldn't have all that much tax to worry about. I certainly wouldn't live in my second choice location based on it unless it was a tossup (in which case it really wouldn't be second choice).
The thing to remember is that federal tax is never dependent on the state you live in, only state tax. The effect may not be huge if your income is near the median level or higher.
I would be inclined to argue towards the opposite. The federal income tax rate on long-term capital gains is 15%-20%, depending on income. Many states do not distinguish between capital gains and earned income. In California, that could mean a 12% marginal income tax. So for an affluent retiree, the difference between California and Washington (state) could be a 60% income tax surcharge!
It seems to me that as we move up the pecuniary scale, the relative cost of taxes shifts from consumption-based (sales, car-registration, property) to income based (especially that on passive income). This is why Portland or Los Angeles might offer an overall reasonable tax-burden for someone bringing in $40K/year, while the situation is altogether different if we're looking at $400K/year.
I'm still 3-4 years away from retiring, but my DH and I are considering a move at that time. Arizona's state income tax rates are very reasonable, but we have been considering other states for a change. We haven't ruled out Arizona either, there is a lot to like here, but we are checking out the options. We've lived here for over 20 yrs and the heat begins to take its toll. Cooler areas like Flag and Prescott have housing that is too expensive for our budget.
If you moved to another state in retirement (or are also considering a move), how important of a factor was the income tax tax rate to where you moved? For example, I would love to live in Oregon, but their income tax rates look crazy. I don't know exactly what our income will be, but not a lot. I'd say less than 40K per yr. and after paying for medical coverage, who knows?! We'll be in our late 50's so medicare won't be there for at least 5 yrs. I know there are other taxes to consider too, like property taxes, so it all gets a bit dizzying after a while.
I'm interested in what others have experienced after moving and/or discovered in researching places.
Some random thoughts.
1) If you are low to middle income, taxes should not be a prime consideration in your move. In that case, I would be looking for a retirement place that offers good social services and subsidized housing. Those are NOT readily in the low tax states.
2) You have to look at the state income tax rates. Arizona's highest marginal rate is 4.5% while Illinois is at 5% this week. However, to get to Arizona's top rate, you need an income of $300k; Illinois comes almost immediately.
3) What are the property tax rates? Texas has no income taxes but the property taxes can be as high as 5% of the value of the home from my personal experience. Also, does the state offer some relief for senior citizens, veterans, and the disabled? Some do, but in many you have to request it.
4) The BIG LIE that gets repeated over and over on this forum is that taxes DON'T matter in retirement because they'll get you one way or another. That is crazy. Each state may collect taxes in different way but the total taxation is much lower in states like Nevada or Arizona than they are in Ohio and Illinois. I have the scars to prove that. On the flip side, there are fewer services provided and less bureaucracy. Personally, I prefer higher sales taxes as a good number of services and items are NOT taxed and I spend less than my income.
5) The big gorilla that few consider at retirement is the RMD. Take your 401(k) and traditional IRA balances that you have, divide them by 20 or 25 and that will be a rough estimate of the amount of income you will have to report when you reach 70.5.
6) You have to figure out if the state you plan to live in taxes retirement income (pensions, RMD distributions, etc.) Some states exempt a portion while other do not.
7) If you are a high income person, I recommend hiring a CPA in the place where you are looking at to give you an idea of the tax situation you are facing.
Overall cost of living was our big driver in our move to TN and taxes were a large part of that. For us, the bulk of our income is from pension, so it was important that pensions not be taxed. We lived in CA before we moved, which is one of the states that tax pensions, so that amounts to several thousand a year that we save. TN doesn't tax income except from dividends and capital gains, which is a much smaller source of income for us. In addition, the property tax rates are much lower in TN because they tax on 1/4 the appraised value of the property, not the entire appraised value, and the value of the same size and type of home is lower, so that compounds the savings. That's several more thousand a year for us. The vehicle taxes here are variable by county, and in our county we pay the minimum ($27/vehicle). This is a minor savings, a few hundred dollars a year, but it does add up over time since we have several cars and motorcycles. The sales tax is higher here than in CA, but not significantly (1/4 to 1/2 percent higher). A lot is made of the fact that groceries are taxed here at something like 5%. That amounts to an additional cost of about $350 a year for us, so maybe that is a wash when weighed against the vehicle tax savings. Many other costs are lower here, gas, propane, electricity, and water for instance. I feel it is important to look at the entire cost picture, if possible, rather than focus on one tax.
Overall cost of living was our big driver in our move to TN and taxes were a large part of that. For us, the bulk of our income is from pension, so it was important that pensions not be taxed. We lived in CA before we moved, which is one of the states that tax pensions, so that amounts to several thousand a year that we save. TN doesn't tax income except from dividends and capital gains, which is a much smaller source of income for us. In addition, the property tax rates are much lower in TN because they tax on 1/4 the appraised value of the property, not the entire appraised value, and the value of the same size and type of home is lower, so that compounds the savings. That's several more thousand a year for us. The vehicle taxes here are variable by county, and in our county we pay the minimum ($27/vehicle). This is a minor savings, a few hundred dollars a year, but it does add up over time since we have several cars and motorcycles. The sales tax is higher here than in CA, but not significantly (1/4 to 1/2 percent higher). A lot is made of the fact that groceries are taxed here at something like 5%. That amounts to an additional cost of about $350 a year for us, so maybe that is a wash when weighed against the vehicle tax savings. Many other costs are lower here, gas, propane, electricity, and water for instance. I feel it is important to look at the entire cost picture, if possible, rather than focus on one tax.
Interesting information. The tax on vehicles here is a lot more, until your car gets old. So are you happy with living in TN over CA, other than the tax situation?
We're moving from California to Idaho when I retire. State taxes were a consideration for us, but not the most important factor. Maybe not even in the top 5. Since we were looking at north Idaho, we did consider eastern Washington, where we would have no income tax. In the end we liked nearby north Idaho enough that we crossed Washington off our list despite the favorable income tax situation.
You do need to consider the progressivity of the tax structure, and our example is an excellent case in point. Even though the top rate in Idaho is 7.4% compared to California's top rate of 12.3%, our effective tax rate (total state income tax divided by total income) will be almost identical in Idaho compared to what it's been in California. In Idaho you hit that top bracket at about $24k income for a married couple, but in California you need to make over $519k annual income to pay any tax at the 12.3% rate.
Interesting information. The tax on vehicles here is a lot more, until your car gets old. So are you happy with living in TN over CA, other than the tax situation?
Oh yes! We are in east TN near Knoxville in a lake community. I'm sure people here are just about sick of me saying how much we love it. We have a true 4 season climate ( a couple inches of snow per year), and the pace of life is much more relaxed. People are very kind and polite, traffic is non-existent. There's a lot of outdoor recreation available, and our community has numerous amenities. We're less than an hour from Great Smoky Mtn Nat'l Park. We've made a lot of friends and are happy that we not only can afford to live a nice life here, we are actually able to put money into savings most months. That's something that we certainly would not have been able to say if we had stayed in our old home in CA.
Last edited by TheShadow; 10-04-2015 at 05:09 PM..
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