Which State Offers You The Best Tax Advantages for Your Retirement?Jan 29, 2021
Ah, retirement. Fun in the sun, golf, and lemonade by the pool are the dream of every working person. While you’re welcome to retire anywhere you want, where you choose to retire can have a significant effect on your finances and retirement lifestyle.
The right state for your retirement will depend on your level and sources of income. Different states have different tax laws that can really make a difference in the amount of money you'll have leftover in your pocket at the end of each month. It’s financially smart to consider your financial situation and sources of retirement income before you choose.
During retirement, determining your best taxation situation depends on more than just seeing if your state has a state income tax or not. For example, your favorite state might have a state income tax, but not tax pension income. So, if pension income is your main source of income, it might still benefit you financially to consider that state.
Let's look at the 4 main taxes different states apply to varying degrees:
- Taxes on Pension Income. Currently, there are only three states that don’t tax pension income. Those states are Mississippi, Illinois, and Pennsylvania. If you have a military or government pension, there are several more tax-free options: New York, Michigan, Hawaii, Kansas, Louisiana, Massachusetts, and Alabama.
- Other states tax your pension income to varying degrees. Do your homework if you receive a pension as part of your retirement income.
- Sales Taxes. If you don't want to pay any sales tax, then Alaska, New Hampshire, Oregon, and Montana are your answer. Of course, sales tax rates vary from state to state. Also, some states exempt certain items like food and medical care / medical supplies. Take a look before you make the leap.
- The more you like to shop, the more sales tax will detract from your bottom line.
- Property Taxes. If you own an expensive home or multiple properties, property taxes can be significant. Property taxes are largely a function of property values, so you can limit your property taxes by living in an area with lower real estate prices.
- Keep in mind that city and local taxes can be a significant portion of property taxes. Find out what you can expect to pay in property taxes before you choose your retirement location. In certain areas, it might even make sense to rent instead of own property.
- Taxes on social security benefits. There are 36 states (and Washington D.C.) that do not tax social security benefits. The other states do tax to some degree, though most of these states have limits to the amount that can be taxed. Thankfully, there are a lot of ways you can avoid paying taxes on social security.
- The degree to which this tax impacts you will depend on your other sources of income. If your only income is from social security, this tax will matter more to you. This tax will be minimal for most folks, but be sure to find out how it may impact your situation in your desired locale.
Now that you know the main taxation issues that can affect your retirement funds differently in each state, you may want to really dig into the information that's available online to make a wise choice.
There are seven states that have no tax on a wage income right now. By 2021, Tennessee will be joining this list. Remember, there are a variety of things to investigate before choosing one. We have listed the states in order.
- South Dakota
Visit the Department of Revenue website for each state that interests you as a possible retirement location. The information is easy to find and available to everyone.
Everyone dreams of retiring to the perfect location, but some locations are more retirement-friendly than others. If you'll do your homework before you move, it's a lot more likely that your move will be a happy one. Make an informed decision and enjoy your retirement!
Now go and grow!
Michelle R Russell
© The Prosperity Process, LLC
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