Are you happy where you’re living now? You may be comfortable in your location because it’s close to where you work, it’s a great place to raise your kids, and it’s close to your friends and family. But it doesn’t have to be forever. In fact, you might contemplate a move in the near future, especially if you’re nearing retirement or are already retired.
Why would you move? For starters, there could be personal issues. You might enjoy living in a warmer climate, getting away from congestion, and living closer to a golf course or by water. But economic considerations, especially with regard to taxes, also may be part of the equation. Depending on your situation, it may be far less costly for you to live somewhere else when you take state and local taxes into account. Consider the following:
You may be living in a state with high income tax rates. When you add state and local taxes to your federal tax load (including a top income tax rate of 39.6% and a 3.8% Medicare surtax), your top tax rate could exceed 50%. You could save money by moving to a state with lower rates. A few—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—don’t have an income tax.
You may be living in a state with high taxes on retirement income. The tax treatment of retirement income varies widely around the country. For example, some states don’t tax any income from retirement plans and Social Security benefits, some provide a partial exemption, and some tax all retirement income.
You may be living in a state with high sales taxes. Almost all states impose sales and use taxes, but there’s wide variation in the rates. Only five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—don’t have a sales tax. This could be a prime consideration if you expect to make substantial taxable expenditures during retirement.
You may be living in a state with high property taxes. Although the real estate market generally has been soft recently, there has been little relief from property taxes for homeowners. And that town whose high property taxes may have seemed worthwhile when you were sending your kids to its great schools could be less appealing when your nest is empty.
You may be living in a state with high inheritance taxes. This is a final factor that could influence where you choose to retire. The rules differ from state to state, and in several states the laws deviate from federal estate tax law.
All of these tax considerations could affect what you’ll spend during retirement. With a little homework, you may be able to find a place with low taxes and one that appeals to you for other reasons.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.