State and local governments levy a variety of different taxes within their jurisdiction. While people still in the workforce have limited options in choosing the location of their residence once on a career path, seniors not tied to any specific location for employment any more may have more latitude in relocation decisions. State and local taxes play an important role in retirees’ selection of retirement destinations.
Four major types of taxes need to be taken into consideration: income taxes, sales taxes, property taxes and inheritance and estate taxes.
Income taxes are collected on personal income earned through employment, investment or from federal, state or other benefits. They are established as a percentage of the income to which they apply. Different types of income are taxed at different rates. From the perspective of retirees, taxation of social security, Medicare and Medicaid benefits and retirement investment income, such as payments from various pension plans, annuities and 401(k) withdrawals are of special importance. Specific laws may apply to retirement income for certain groups of seniors, such as retired federal or state workers of certain professions drawing pensions from special pension schemes.
States and local authorities may also collect taxes on the purchases of products and services typically at the point of sale. The rates applied to the different types of products and services can vary significantly from state to state and from product to product. While overall, the general level of state taxes is important, pensioners should specifically focus on the sales taxes levied on consumer staples and basic necessities, such as foods, gas and utilities, as well as on prescription drugs, medical services and equipment.
Property taxes are generally within the authority of local municipal governments. A wide variation prevails not only in the rate of taxation – the percentage of value to be paid as tax – , but also in the assessment of the value that the property tax is based on and the various exemptions or refunds available. As property taxes are primarily used to fund education, seniors above a certain age often qualify for exemptions.
Finally, inheritance and estate tax laws impacting the beneficiaries or the estate of deceased individuals van vary significantly across the different states.
Depending on the specific financial circumstances of seniors, the various types of taxes will play a different role in their finances during their retirement years. For seniors relying primarily on Social Security income and other benefits, the specific laws governing the taxation of these items will be the most important along with the level of sales taxes. For retirees with significant investments, income taxes on investment income and potentially inheritance and estate taxes will matter the most. Although property taxes eventually affect rents, as well, taxation on real estate will be of more concern to homeowners.
The list of most retiree friendly states is based on the assessment of all four key tax categories and includes those regions which provide preferential treatment to seniors or all tax-payers with regard to all four key tax categories. The actual impact of the differences in state and local taxation rules on a specific individual’s final tax liability depends on a complex set of factors and is best understood with the help of a financial planner or tax accountant.
Wyoming
Wyoming collects significant revenues from oil and mineral rights, allowing it to treat its residents very favorably and imposing a significantly lighter tax burden on them than most US states. The state has no income tax on personal income of any source. The sales tax rate is 4%, but food and drug products are tax-free. Counties and towns may add taxes up to 2-4% on top of the state sales tax.
Property taxes are assessed based on 9.5% of the market value and maximum tax rates are fixed at 1.2% for counties and 0.8% for towns and cities. For homeowners meeting certain income and net worth eligibility criteria tax refunds are provided within property relief programs. In addition to these programs, seniors over 65 with certain income levels can receive up to $800 in tax refunds for property, utility and sales taxes.
Wyoming levies no taxes on estates or beneficiaries of estates.
Kentucky
While Kentucky has a state income tax levied on personal income, the state exempts Social Security benefits, Roth IRA proceeds and Railroad Retirement benefits from state income tax. It also allows for the deductions of up to $41,110 of a wide variety of retirement investment income per person and year. Ordinary state income tax rates range between 2 and 6%.
State sales taxes of 6% are average compared to the other states. The exclusion of food, prescriptions, residential utilities and medical equipment from taxation is beneficial for seniors.
State property taxes are assessed at 1.13% of the total market value of owned real estate, but seniors 65 years and older can claim exemption for $34,000 of assessed value.
Louisiana
Similarly to Kentucky, the state’s income tax rates range from 2% to 6%. However, Social Security benefits, military, civil service, federal, state- and local government pensions are not taxable. Seniors above 65 years can exclude up to $6,000 of private personal retirement income from income taxation.
Sales taxes are 4%, but local parishes and jurisdictions may levy additional sales taxes up to a total rate of 10.75%. Utilities are taxed at 3.8%, telecommunication services at 2%. Food, drug and a variety of medical equipment products are taxed at the local level, only.
Louisiana has extremely beneficial property taxes. Assessed values are set at 10% of the market value. Homestead exemption for up to $7,500 assessed value make all properties valued at less than $75,000 free from property tax liability. Seniors over 65 and below a certain income level can request Special Assessment, essentially freezing their assessed property values for the rest of their lives.
The state has no inheritance or estate tax, and only mandates the filing of an estate-transfer tax return for estates’ exceeding $60,000.
Mississippi
The state’s income tax rate ranges from 3 to 5%, but Social Security benefits, retirement income from IRAs, 401(k)s, 403s, Keogh plans and qualified public and private pension plans are fully exempt.
While state taxes are relatively higher at 7%, with local taxes potentially adding 3%, gas, prescription drugs, residential utilities, health services and Medicaid or Medicare payments are not taxed.
Real estate property and vehicles carry property tax obligations with single-family residential homes assessed at 10% of market value. Homeowners above 65 qualify for an exemption for up to $75,000 of property value, with the exemption, once established, carried forward without a need for renewal applications.
The state levies no inheritance or estate taxes.
Georgia
Similarly to its Southern neighbors, Georgia does not tax Social Security benefits. Seniors over 62 can request a permanent adjustment for tax purposes for most types of retirement incomes up to $35,000 for single filers and $70,000 for couples.
State sales tax is relatively low at 4%, but additional locally levied taxes can increase it to 8%. Food and prescriptions remain exempt.
Property taxes are collected by a combination of governments at the state, county, city or school district level. The assessed value is based on 40% of the fair market value. Homeowners residing locally are granted homestead exemptions for state property taxes, with seniors over 62 potentially receiving age-based exemptions. Lower level authorities may provide additional exemptions for qualifying seniors.
No inheritance or estate taxes are collected in Georgia.
Other retiree-friendly states
In addition to the above states, South Carolina, Oklahoma, Maryland, Alabama and Pennsylvania also offer significant tax advantages to retirees. Some of these states, such as South Carolina, Oklahoma and Maryland offer less generous exemptions for retirement incomes. While Pennsylvania has one of the most retiree-friendly state income tax system in the US, allowing retired individuals to claim tax-exemption for most retirement income from age 59 1/2, the state’s property taxes can be steep and inheritance tax is also collected. Maryland’s income tax benefits may be offset by high property taxes that are levied on the basis of an assessed value equal to full cash value..
Other considerations
While the expected tax obligation is a crucial factor in relocation decisions for retirees, it is important to remember that tax laws can and do change. As states and local authorities continue to struggle with the fallout of the 2008 crisis and recession, they may be forced to modify tax rules to raise revenue, affecting taxpayers including all or some retirees.
Finally, states with lower overall tax revenues may provide more limited services and possess lower quality infrastructures. While preferential tax treatment of seniors does not necessarily mean lower overall tax revenues, retirees should understand the various states’ aggregate revenues, sources of taxation and their impact on the states’ financial strength and ultimately, on residents’ lives.
Additional resources:
Kiplinger Retiree Tax Heavens