Every client’s goals are different when it comes to choosing where to retire, but from a tax perspective, there are some clear winners that can allow a client to maximize the value of accumulated retirement savings.
While the client’s lifestyle choices — a desire for an expensive home vs. spending on consumer products, for example — greatly impact the tax system that will provide the most substantial benefits, below is a list of ten of the top states for retirees, from a tax perspective.
A note on residency: For clients seeking to take advantage of some of the property tax exemptions permitted in these states, it’s important to note that they must generally establish residency in the new state in order to be eligible. Establishing residency can be accomplished in a variety of ways, including by providing proof of the date out-of-state residency ended and in-state residency began (for example, by showing an in-state drivers’ license, utility bills, vehicle and voter registration, and addresses on bank statements and IRS returns).
While Alaska might not be the most obvious state that clients look to for retirement, when it comes to taxes, the advantages are undeniable. Alaska has no state income tax, no estate or inheritance taxes and no sales taxes.
As a bonus, Alaska state residents receive an annual dividend check derived from the state’s oil wealth. According to Tax Foundation research, Alaska also imposes one of the two lowest median property tax rates in the country — and homeowners aged 65 or older (and surviving spouses aged 60 or older) are exempt from municipal taxes on the first $150,000 of their home value.
Though retirees aren’t likely to find many of the outdoor leisure activities that some of the more obvious retirement states offer, from a pure tax perspective, retiring in Alaska is a winner.
The wide-open spaces of Wyoming may not have made your client’s list of ideal retirement settings, but with no state income, estate or inheritance taxes, the tax advantages are clear.
Property taxes in Wyoming are established based on a fractional assessment system, which results in most property being assessed on only 9.5 percent of its market value. Further, state sales taxes are lower than the national average, at 4 percent, with exemptions for prescription drugs and food.
South Dakota’s property taxes are a bit higher than Alaska and Wyoming, but resident seniors aged 65 and older qualify for an assessment tax freeze or a municipal tax reduction if their income falls below certain threshold values and the value of their home is less than approximately $182,000.
Property tax refunds are also available for low-income senior citizen residents (generally, income must be as low as $10,250 for single taxpayers and $13,250 for couples). South Dakota income, estate and inheritance taxes are favorably set at zero percent, and, like Wyoming, the sales tax is a relatively low 4 percent.
Georgia is creeping up in the rankings when it comes to the best retirement states — not only is its weather relatively mild compared to other tax-friendly jurisdictions, but it has plans to phase out its property tax system by 2016.
Currently, Georgia residents aged 65 and older are exempt from all state property taxes on their homes, as well as up to ten acres of land. The state income tax ranges from 1 to 6 percent, but Social Security income is exempt. Residents aged 62-64 can also exempt up to $35,000 per year in other retirement income, rising to $65,000 for those aged 65 and older (which can exempt up to $130,000 per couple).
Georgia does not impose a state estate or inheritance tax, and sales taxes are relatively low at 4 percent (with exemptions for food and drugs), though local taxes may add to the state sales tax burden.
Louisiana does impose a state income tax of between 2 and 6 percent, but offers attractive exemptions for retired residents. Social Security benefits are exempt from Louisiana’s income tax, as are government pension funds (including military and civil service pension funds).
Residents 65 and older can also exclude up to $6,000 of annual income from private pensions, annuities and IRAs. Louisiana does not impose an estate or inheritance tax, and the sales tax is low at 4 percent with exemptions for food and prescription drugs.
Further, Tax Foundation research suggests that Louisiana state property taxes are one of the lowest in the U.S., with the added bonus that retired residents age 65 or older with income below approximately $70,000 are eligible for an assessment freeze on their home value for as long as they live in the home.
Mississippi’s state income taxes may be a bit higher than other winning retirement states (3 to 5 percent), but the exemptions for retired residents are generous — all Social Security benefits, income from IRAs, 401(k)s, 403(b)s, Keogh plans and income from both public and private pensions are completely exempt.
Sales tax is likewise a bit higher at 7 percent, but prescription drugs, utilities, fuel and health care services are exempt. Mississippi imposes no estate or inheritance tax, and its property tax rates are extremely low — the median property tax rate on a $100,000 home is about 0.5 percent, and senior citizen residents qualify for a $75,000 homestead exemption.
(Photo: Downtown Jackson, Mississippi)
Florida is one of the most obvious choices for retirees looking to enjoy warm weather and all of the leisure activities it permits, but it actually stacks up fairly well from a tax perspective.
Florida imposes no state income, estate or inheritance taxes, though it has an average sales tax of 6 percent. However, Florida residents qualify for a $50,000 homestead exemption that can substantially reduce property taxes if the client establishes Florida as his or her primary residence.
Even better? Residents in some Florida localities who are aged 65 and older can qualify for an additional $50,000 homestead exemption if they meet certain income requirements.
Depending upon the locality, Nevada’s property taxes are very low — but there are no tax exemptions for residents, so the entire value of the client’s home is subject to property tax. The Tax Foundation calculates that Nevada residents bear the 21st lowest national property tax burden.
Fortunately, Nevada imposes no state income, estate or inheritance taxes, though its sales taxes are about average at 6.85 percent (food and prescription drugs are exempt from Nevada state sales tax).
Texas imposes no state income, estate or inheritance taxes — and technically has no state property taxes, though it has authorized local governments to collect property taxes, with a $15,000 homestead exemption for residents.
Seniors aged 65 and older are entitled to exempt an additional $10,000 of the property’s value from school taxes and $3,000 from other local taxes that may be imposed. Despite these exemptions, actual property taxes in Texas remain relatively high, with the Tax Foundation estimating that they are the 15th highest in the U.S. Sales taxes in Texas are about average, at 6.25 percent.
Arizona is another of the more obvious retirement locales that makes the short list for tax-friendly retirement states — state income tax ranges from 2.59 percent to 4.54 percent, with exemptions for Social Security benefits.
Arizona retirees can also exclude up to $2,500 in military and civil service pensions or Arizona state government pensions — out-of-state pensions are fully taxable. Because Arizona does not impose its own state property tax, property taxes can vary considerably by locality, though low-income seniors are eligible for a tax credit of up to $502 for property taxes.
Arizona residents who are 65 or older and have established Arizona as their primary residence for at least two tax years can also apply for a property valuation freeze. Arizona has no state estate or inheritance taxes, and has an average sales tax of about 5.6 percent, though local governments can add their own sales taxes into the mix.
Whether your client is looking for warm sunny weather or wide-open spaces with mountain views in retirement, the financial implications of a state’s tax climate can’t be ignored — and some of the most tax-friendly states might pleasantly surprise your clients as they plan for retirement.
Robert Bloink and William H. Byrnes are the authors of 2015 Tax Facts on Individuals and Small Business, which focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often-complex tax rules. It is the essential tax reference for financial planners and insurance professionals.