Showing posts with label save money on taxes. Show all posts
Showing posts with label save money on taxes. Show all posts

Saturday, May 25, 2013

Save Money on Taxes After Retirement

Are you planning your dream retirement, but worried about how to afford the best lifestyle for your money? One way to make your pension and Social Security benefits go further is to live in a state that does not take a big bite out of them.  Fortunately, there are several states that do not require you to pay income taxes on these benefits and they are scattered throughout the United States.  The magazine, U.S. News and World Report, recently published a list of these states so that retirees can decide which one will work best for them.  They also included information about 2008 property tax rates and sales tax rates in each of these states.  As always, I have added my own comments,  since there are other factors that retirees will need to consider.

States with Low Taxes

Alabama - This state does not tax your Social Security benefits or pensions, and it only has a 4 percent sales tax. In addition, many people pay less than $400 a year in property taxes.  The low tax rates are especially appealing when you also consider the fact that, like most other southern states, Alabama has a low cost of living, making it very appealing to many retirees.  In addition, the weather in Alabama can be quite mild in the winter, although it gets hot in the summer.  You may want to look along the coast of the Gulf of Mexico for an relaxing, low cost retirement community.

Alaska - In this state, you will pay no income taxes and no sales taxes at all.  However, median property taxes are almost $2,400 a year.  There are other financial benefits to living in Alaska, as well.  One very popular financial windfall is the fact that, instead of paying income taxes, residents actually get an annual rebate from the state because of the large amount of revenue the state collects from the oil industry.  When my husband and I took a tour of Alaska, many of the tour bus drivers and gift shop employees were retirees who only worked during the three months of summer.  They were often very enthusiastic about sharing their stories of how much they loved living in this magnificent state for people who enjoy the great outdoors.  However, winters are very long and dark and not everyone will be happy living there during retirement.  In addition, if the rest of your family lives in the lower states, it will not be cheap or easy to visit them. Relocating here is not a decision to be made quickly based on one summer visit.

Florida - One reason so many people have traditionally retired here is because there is no state income taxes for anyone and only a 6 percent sales tax rate.  The median property taxes are a little under $1,900 a year.  Home prices are very low in Florida, too, with many homes in over-55 communities available for under $150,000, and it is not uncommon to find homes for under $100,000.  Florida also has the advantage of pleasant year around weather, which makes it appealing to many people who move there from states that are further north. This state will certainly continue to be popular with retirees in the coming decades.  Many beach communities have become quite expensive, although it is possible to find desirable communities that are less than a 30 minute drive to the beach.

Mississippi - This is another state with no taxes on either your Social Security benefits or pensions, and the average property taxes are under $500 a year.  However, there is a 7 percent state sales tax.  Mississippi is next door to Alabama, and there is a lot of similarity between those two states in climate and the low cost of living.  Again, you may be able to find an affordable and desirable retirement community within a short drive of the Gulf of Mexico, which could be very appealing to people who have always dreamed of a beach town retirement.

Nevada - Because of the money they raise from gambling, this state has no state income taxes for anyone.  The median property taxes are under $1,800 a year and the state sales tax is 6.85 percent.  While the property taxes and sales taxes are higher than the southern states, many people enjoy the fun Nevada lifestyle.  Nevada also has several quite diverse climates, including the desert climate around Las Vegas and the mountainous regions surrounding Reno and Lake Tahoe.  Many Californias who are looking for a less expensive place to live after they retire have been attracted to Nevada.  During the recent recession, Nevada was one of the states that was particularly hard hit.  As a result, property values in many areas are quite affordable.

New Hampshire - In this state, you will pay no income taxes on most forms of retirement income, although residents do pay taxes on their interest and dividend income.  This could be a significant cost for someone who is living primarily off of their investments, so watch out!  In addition, New Hampshire has exceptionally high property taxes, but no sales tax.  Whether or not living in this state will work for you may depend on your sources of retirement income and whether or not you can afford to pay the higher than average living expenses.  To be honest, although this state is included on the U.S. News and World Report list because of the lack of income taxes, other expenses may offset this savings, making it a much less affordable place to live than some of the other states on this list.

Pennsylvania - This state charges no income taxes on either Social Security benefits or your pension.  However, the median property taxes are over $2,200 and the sales tax rate is 6 percent.  One of our daughters lives in the Poconos, in a charming community where a lot of New Yorkers have retired.  While Pennsylvania may not be the cheapest place in the US to retire, it is considered a bargain by many New Yorkers who want to stay close to Manhattan, but in a more affordable location.  If the state of Pennsylvania interests you, check out my blog post from a couple of months ago called, "Retire to Friendly Lancaster County, Pennsylvania."  This particular county has several affordable retirement communities, and has become very popular with people who want to retire in the Northeast.

South Dakota - No state income taxes are paid by anyone who lives in South Dakota.  In addition, the median property tax is under $1,600 and the sales tax rate is only 4 percent.  However, like Alaska, the winter weather in South Dakota can be quite severe, so this state is not for everyone.  If you are already living in one of the northern states, though, South Dakota may be an affordable alternative if you want to stay in the area but keep your expenses low during retirement.  If you are not familiar with the area, I suggest that you rent for a while before you decide if you want to live there permanently.

Tennessee - Like New Hampshire, there are no income taxes on most forms of income, with the exception of dividends and interest.  In addition, median property taxes are under $1000 a year.  The sales tax rate, at 7 percent, is slightly higher than some other states.  In addition, Tennessee is further south than several of the other states on this list, particularly New Hampshire, South Dakota, Pennsylvania and Alaska, so the weather will be a bit more temperate ... although you may still get a little snow in the winter.  Property values in many parts of Tennessee are quite affordable, too.  This is a great location for people who wish to stay within driving distance of many of the lower mid-west and southern states.

Texas - This state has been mentioned many times in this blog as a popular retirement location.  There is no income tax for anyone in Texas, and the state sales tax rate is 6.25 percent (although many towns and cities do have additional sales taxes of their own.)  However, property taxes are a little high and cost the median family over $2,300 a year.  Housing prices in many parts of Texas, especially the small towns, are quite affordable.  Some of the areas of Texas that are quite popular with retirees are near Austin (Sun City Texas is only 30 miles from there), as well as along the Gulf of Mexico.   The Texas Gulf Coast is a very affordable region for people who want to retire in a beach community.

Washington State -   There is no income tax in the state of Washington, although the median property taxes amount to over $2,600 a year.  This is one of the highest rates for any of the states mentioned in this article.  The sales tax rate is 6.5 percent.  Many people love to live in the northwestern United States, and a number of retirees have been attracted to the San Juan Islands. We have friends who retired twenty years ago from Texas to Friday's Harbor in the San Juan Islands, and they never regretted the decision.

Wyoming -  This is one more state that does not have an income tax.  Other taxes are quite low, as well.  The median property taxes are not much over $1,000 a year and the state sales tax is a very modest 4 percent.  However, like some of the other states in the Northern U.S., this location may not appeal to everyone.  I worked in Wyoming one summer while I was in college, and we were having snow flurries when I left on the last day of August!  I grew up in Missouri, so I was used to cold winter weather, but this seemed like an early start to winter to me.  In addition, while I was not there during the winter, I heard many stories about blizzards and harsh winter weather.  Many of the people I met owned property in Wyoming but only lived there in the summer.  This is another location where you may want to rent for a year or two first, especially if you are moving there from someplace with a moderate climate.

If one of your biggest financial concerns after retirement is the amount of money that you will lose to income taxes, then the above list should be helpful.  Obviously, which state will be best for you depends on your personal source of retirement income, since a few of these states will take a bite out of your dividends and interest.  In addition, there is a wide range in the amount you might pay in property taxes from state to state, and that could easily more than offset the amount of state income taxes your might pay.  If you plan to purchase a home when you relocate, you will definitely want to take these taxes into consideration.  Choosing the right state for your retirement is dependent on a number of other factors, as well.  For example, if you will be living a long way from your children and grandchildren, you have to factor in the cost of traveling to visit them. 

Wherever you decide to live when you retire, take the time to work up a budget for several different locations.  In this way you will see the big picture and not base your decision solely on one factor, such as state income taxes.

If you would like more information to help with your retirement planning, check out the index articles listed below.  Each one contains an introduction and links to a number of articles on that topic:

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

Resource for tax rates:

http://money.usnews.com/money/retirement/slideshows/12-states-without-pension-or-social-security-taxes

You are reading from the blog:  http://baby-boomer-retirement.blogspot.com

Photo of night sky courtesy of www.morguefile.com