Protecting Your Retirement Income By Paying Lower Taxes
By Ralph Smith
Wednesday, February 13, 2008
Earlier this week, we ran an article on state and local taxes and these taxes can provide more or less favorable treatment for federal retirees (See Taxing Retirees: Some States Will Give You a Break (And Some Won't))
When planning your retirement, high taxes may be an incentive to move. People living in areas with high taxes often want to make their retirement money go further by handing over fewer dollars to state and local governments.
Do Americans really pay attention to taxes when choosing where to live? Apparently they do. And it isn't just retirees that choose to move to states with lower taxes. A new survey by United Van Lines, as reported in the Wall Street Journal, finds that the states without an income tax are finding more people moving within their borders. These American emigrants often come from states with high tax rates which are generally losing many of their most productive citizens.
The top five states seeing their citizens leave:
- Michigan
- North Dakota
- New Jersey
- New York
- Illinois
The states in the following list do not have an income tax (although Tennessee and New Hampshire do tax income from interest and dividends)
- Florida
- Alaska
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Of course, income taxes are only one part of the overall tax burden. High city taxes, property taxes and other assorted taxes all come into play. And states without an income tax are not always the ones with the lowest tax burden. Alabama, for example, has a state income tax but the overall tax burden is among the lowest in the country.
Here are the top five most popular destinations for Americans on the move and their overall tax burden (the national average is 11%):
- North Carolina (11%)
- Nevada (11.9%)
- Alabama (8.8%)
- Oregon (10%)
- South Carolina (10.7%)
Some astute readers will comment that a person may leave a state for a variety of reasons. North Dakota, for example, has a cold climate as do the other top five states losing its citizens. On the other hand, the climate in South Dakota is not that much different and it was one of the top 10 destination states. South Dakota does not have an income tax and North Dakota does have one. The other top states losing their citizenry are also states with high tax burdens.
California used to be the premier destination for Americans on the move. That problem has been solved. It now has the highest state income tax in the country. It is now the only state on the Pacific Coast to lose migrant population in 2007. Nevada, one of the no-income tax states, is one of the biggest beneficiaries of those fleeing California's taxes (and, perhaps, the traffic and congestion in the larger cities there).
Not surprisingly, the people who are the most mobile are often those with the most to lose. In other words, people with more money, more education and higher paying jobs pay the most in taxes. They also are inclined to go to locations where they are wanted--or at least where they don't have to pay as much for state and local government services they may not need or want.
If you are retiring, your most important factors may be much different than someone in mid-career. A warm climate, recreational facilities, or an abundance of restaurants and entertainment (not to mention children and grandchildren) may play a major role in your decision.
For the sake of clarification, several readers commented that they are still paying federal income taxes despite living in a state that does not tax federal retirement. Their observation is correct. The article stated that ten states exempt all federal, state and local pension income from taxes and listed those states. Their conclusion that they must be erroneously paying federal taxes is not correct. While a state can exempt your retirement pension from state taxes, you will pay taxes to the federal government (or face unpleasant alternatives) regardless of which state you choose to live in.
I also received email and comments from several people who were miffed that Washington, DC was not mentioned--presumably as a good place to retire--and because many of our readers live in Washington and may retire there.
Washington, DC was not mentioned in the article because, as far as taxes are concerned, it is not a good alternative for retirees. It's total tax burden is about 12.5%--one of the highest in the country. (The national average is 11%). It isn't as high as Vermont, Maine, New York or Rhode Island but it still is among the top ten in taxing its citizens. (Even higher in its overall tax burden than California.)
In short, there may be strong personal reasons for a person to retire in Washington, DC but favorable tax treatment is not one of these reasons. You can check out this list of the overall tax burden by state as you consider all of the factors that are important to you in deciding where to live when you retire.
And, as noted in the earlier article, please check with your tax adviser before you sell your house and move to your dream home and make sure you have the latest information on taxes and how your personal situation may be impacted by the wide variety in state and local tax laws.
© 2008 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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