Retirement tips | Financial Most Tax Friendly States

A surprising number of people list “most 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.

States that don’t have income taxes. There are 8 states that have no income tax:

Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming

New Hampshire only taxes 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 list of the 10 most tax-friendly towns in December of 2008. It is an interesting list of towns, most of which are in states that have no income or sales tax.