Even after you enter retirement and are no longer earning a wage (or even if you just cut back your work schedule for a “working retirement”), you still need to do tax planning. Your retirement income is still generally subject to federal taxation, regardless of whether its investment income from your 401(k) or Traditional IRA, pension income, or even in some cases Social Security income.
But while you won’t be able escape your liability for federal taxes, you have a greater degree of control over how much you’re liable for in state taxes. Different states have different ways of generating tax revenues, including different tax rates and subjecting different sources of income to different tax rates.
Here’s some retirement advice if your retirement plans might include moving to a different state.
States With No Income Tax. There are seven states that do not impose a tax on individual income, regardless of the source of that income. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
States With Limited Income Tax Burdens. In addition, there are several states that do not impose tax on every type of income. For example, Tennessee and New Hampshire only impose income tax on interest and dividend income received by its residents, but not other types of income.
States Exemption Pension Income from Taxation. Pennsylvania and Mississippi completely exempt pension income from taxation, while certain others (Arkansas, Colorado, Delaware and New York) provide a partial tax exemption.
States Imposing Tax on Social Security Benefits. Social Security benefits are subject to federal income tax, but only 13 states also impose a state-level tax on that income. These states are Connecticut, Colorado, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Jersey, North Dakota, Rhode Island, Vermont and West Virginia. Note, however, that some of these states provide a certain measure of tax relief for individuals with a lower overall income level.
Sales and Use Taxes. Sometimes a state will look to other tax structures besides an income tax in order to fund government operations. All states in the U.S. impose a sales and use tax, except for Alaska, Delaware, Montana, New Hampshire and Oregon.
Other Taxes May be Imposed. When you’re considering a retirement move to another state, it’s essential to consider more than just the tax you’ll pay on income. For example, state and local property taxes can represent a significant portion of a household’s annual tax bill – even for retirees. Furthermore, because property tax rates are set on a local level, those who are likely to have larger or more valuable homes would be well advised to consider the levy rates for different towns and municipalities within any state they are considering moving to. So states and localities also offer senior citizen homeowners some type of property tax exemption or credit, so factor this into your analysis.
State laws – particularly those dealing with personal taxes – can change significantly from year to year. While you may wish to take a states tax approach into consideration when planning your retirement, be aware that the applicable tax structure may change over time.
Tags: retirement advice, retirement planning, state taxes on retirement
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Even after you enter retirement and are no longer earning a wage (or even if you just cut back your work schedule for a “working retirement”), you still need to do tax planning. Your retirement income is still generally subject to federal taxation, regardless of whether its investment income from your 401(k) or Traditional IRA, pension income, or even in some cases Social Security income.
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