Considerations before relocating to another state in retirement
Many people plan to relocate to a warmer climate once they retire. But before you load the moving van, consider the state and local taxes in your destination state. You may change your mind.
Income, property and sales tax
Choosing a state that has no personal income tax may appear to provide significant savings. But that might not be the case once you consider property taxes and sales taxes.
Suppose you’re considering two states: State 1 has no individual income tax, and State 2 has a flat 5 percent individual income tax rate. State 1 appears to be the likely winner. However, that might not be the case when you factor in state and local taxes.
For example: Let’s say the property tax rate in State 1 is 5 percent, while it’s only 1 percent in State 2. That difference could potentially cancel out any savings in state income taxes in State 1, depending on your annual income and the assessed value of the home.
Also keep in mind that home values can vary dramatically from location to location. So if home values are higher in State 1, there’s an even greater chance that State 1’s overall tax cost could be higher than State 2’s, despite State 1’s lack of income tax.
The potential impact of sales tax can be harder to estimate, but it’s a good idea at minimum to look at the applicable rates in the various retirement locations you’re considering.
When assessing state income tax, look at what types of income are taxable.
Some states, for example, don’t tax wages but do tax interest and dividends. Others offer tax breaks for retirement plan and Social Security income.
In the past, the federal income tax deduction for state and local property and income or sales tax could help make up some of the difference between higher- and lower-tax states. But with the Tax Cuts and Jobs Act (TCJA) limiting that deduction to $10,000 ($5,000 for married couples filing separately), this will be less help — at least through 2025, after which the limit is scheduled to expire.
Estate tax is also a consideration. Not all states have estate tax, but it can be expensive in states that do. While under the TJCA the federal estate tax exemption has more than doubled from the 2017 level to $11.18 million for 2018, states aren’t necessarily keeping pace with the federal exemption. So state estate tax could be levied after a much lower exemption.
Weigh your decisions carefully
It’s important to factor in state and local taxes as you decide where to live in retirement. You might ultimately decide on a state with higher taxes if other factors are more important to you. But at least you will have made an informed decision and avoid unpleasant tax surprises.
Retirement is a big step. Relocating to another state is as well. Your best bet is: Don’t go it alone. We can help. Contact Sean White in the tax department at Ciuni & Panichi, Inc. at 216-831-7171 or by email here for sound advice before you retire.
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