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Money January 2017

Dollar Sense

Home Sweet New Retirement Home? Bitter State Taxes Could Kill the Deal on Where You Choose to Live

By Teresa Ambord

But unless money is no object, before you move, check out the overall tax situation. That’s not just state taxes but also sales tax, property tax, death taxes and inheritance taxes. Otherwise, you could be in for a nasty surprise that makes life much more expensive than you expected.

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You’ll need to check with your target state to find out how to establish domicile. The definition of domicile varies by state, and failing to meet the qualifications could land you in the position of paying taxes – including estate taxes eventually – to your old state and your new state.

Does the new year find you thinking of a different retirement home? If so, will you stay where you are, or move closer to family, or possibly to a more retirement-friendly state? Obviously the decision of where to move is about more than money, for most people. They move to be closer to family or friends, to enjoy a more suitable climate, or for attractions like golf courses, beaches, hiking, national parks, or whatever.

But unless money is no object, before you move, check out the overall tax situation. That’s not just state taxes but also sales tax, property tax, death taxes and inheritance taxes. Otherwise, you could be in for a nasty surprise that makes life much more expensive than you expected. Case in point, I was asked to write about a couple who moved to their dream home in New Jersey, to retire near family. Soon they realized their property tax was so outrageous that they had no choice but to sell the home at a loss.

The taxes you need to focus on are the taxes that will be most affected by your lifestyle. Here’s an overview.

 

Personal Income Tax

If you expect to have substantial income in retirement, you may want to look at a state with no state income tax (also referred to as personal income tax). They include:

  • Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two other states have no tax on earned income, but impose a limited income tax on individuals with dividend and interest income. So if your retirement income includes a lot of dividend or interest income, this could be a factor.
  • New Hampshire and Tennessee. (Good news, if you are hoping to retire in Tennessee. The current tax on interest and dividends has been repealed and is phasing out. For 2016 it was 5%, and will drop another percent each year till it disappears in 2022.)

Many retirees are attracted to California, for its warmer climate on the southern coast, or the wine country towards the upper central coast. But it also has the highest personal income tax in the nation, at 13.3%. In a recent map of retirement friendly states, Kiplinger’s lists California as a retiree’s tax nightmare, for high income tax and high sales tax, and a governor who wants to push rates even higher.   

Kiplinger’s created a map of the most retiree-friendly states, half of which are on the “no personal income tax” list. Alaska, Florida, Nevada, South Dakota, and Tennessee. You can see the report by logging onto http://www.kiplinger.com/tool/retirement/T055-S001-state-by-state-guide-to-taxes-on-retirees/index.php

If you’re interested, this link will also show you details about the 10 worst retirement states. California, Connecticut, Minnesota, Montana, Nebraska, New Jersey, Oregon, Rhode Island, Utah, Vermont.

 

Property Tax Comparisons

Before you decide to move to a state with no personal income tax, find out about the property tax.

Texas has much to recommend it, including no personal income tax. The average property tax in Texas is 1.93% of assessed value, but inside the Dallas city limits, you’ll pay a whopping 5.44%. On a Dallas home worth $500,000, that’s an annual property tax bill of $27,200. By comparison, in nearby Colorado, a home of the same value would be subject to the state’s property tax of .62%, or $3,100. (Colorado does have a personal income tax, but the flat rate is 4.63%, so weigh the various factors before making your decision.)

Overall the highest property tax is paid in New Jersey (statewide as opposed to certain areas) is 2.29%. As noted before, some retirees have actually been forced to sell their homes because of the unmanageable property tax.

Builders these days seem to be focusing on giant homes, possibly for multiple generations of residents under one roof. If you’re looking for a lot of house, check out the property tax in your target destination.

Here’s a link to the 10 worst property state tax in the country, plus a little information about other taxes in those states. http://www.cheatsheet.com/culture/the-10-worst-states-for-property-taxes.html/?a=viewall

 

What about Sales Tax/Gas Tax?

Five states have no sales tax, according to Kiplinger. Alaska, Delaware, Montana, New Hampshire, and Oregon. So if shopping, especially for big ticket items like expensive cars, boats, RVs, etc. are in your future, this could be a real boon. But check out the total tax package before your shopping instincts take you to a no-sales tax state.

Tennessee, with no earned income tax and a soon-to-be-phased-out tax on interest and dividends, does have the highest average combined state-local sales tax rates in the nation (9.46% in 2016). So if you plan to make a lot of large purchases, think about that.

Washington state has no personal income tax, but exorbitant gas tax at 44.50 cents per gallon in 2016. (Only Pennsylvania is higher at 50.40 cents per gallon). Washington also has among the highest combined state-local sales tax, 8.89% in 2016.

If you like fabulous natural views and can handle the climate, Alaska not only has no personal income tax, but also the lowest gas tax in the nation, in 2016, 12.25 cents per gallon.

Here’s a link to check out the sales tax in your area: http://taxfoundation.org/blog/how-high-are-sales-taxes-your-state-1

 

What Matters to You?

The bottom line is, what trade-offs are you willing to make? If your kids and grandkids live in New Jersey, it might be worth it to you to pay outrageous property tax in order to live close by. If you have significant taxable income in retirement and you need a warm climate, Florida offers no personal income tax and good weather. Just know ahead of time what you’re getting into so you have fewer financial regrets later.

Also, if you are planning a permanent move, you’ll need to check with your target state to find out how to establish domicile. The definition of domicile varies by state, and failing to meet the qualifications could land you in the position of paying taxes – including estate taxes eventually – to your old state and your new state.

 

State Death Tax

If your estate is big enough that you need to consider the estate tax, you probably know that many states also charge a state death tax, which may be over and above the federal estate tax (after a deduction on your federal return for state taxes paid). The federal estate tax in 2017 is generous. It includes an exemption for $5.49 million for an individual, double that for a married couple. Amounts that exceed that exemption are taxed at 40%. So for example, regardless of where you live, if you have an estate of $6.49 million after allowable deductions, your heirs may owe $400,000 to the fed ($6.49 million minus the federal exemption of $5.49 million equals $1 million, times the estate tax rate of 40% equals $400,000).

If the state you move to have a state death tax that is over and above the federal death tax, you need to be aware of the implications. Some states offer the same generous exemption as the fed, but many are less generous.

Here’s a list of the states, the exemptions, and the tax rate on amounts exceeding the exemptions.

Note, some rates may rise in 2017.

Connecticut $2 million exemption, 7.2% to 12.0%

Delaware, $5.45 million, .8% to 16.0%

Hawaii $5.45 million, .8% to 16.0%

Illinois $4 million, .8% to 16.0%

Maine $5.45 million, 8% to 12%

Massachusetts $1 million .8% to 16.0%

Minnesota $1.6 million 9%-16%

New York $3.125M, 3.06% to 16%

Oregon $1M, 10%-16%

Rhode Island, $1.5M, .8% to 16.0%

Tennessee, $5.45 million, 5% in 2016. As noted above, in 2017 the tax rate is 4% and will be gone by 2022.

Vermont, $2.75M, .8% -16.0%

Washington $2.078M, 10%-20%

Washington D., $1M, .8% -16.0%

 

States with Inheritance Tax

Iowa, 1% - 15%

Kentucky, 0% - 16%

Nebraska, 1% -15%

Pennsylvania, 0% - 15%

 

States with Both Estate Tax and Inheritance Tax

Maryland, Estate tax exemption is $2 million, tax rate is 16%, Inheritance tax rate is 0% -10%

New Jersey, Estate tax exemption of $675,000, tax rate is .8% -16% and Inheritance tax rate is 0% -16%

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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