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Tax Day 2021: Should You Move to a Tax-Friendly State For Retirement?

Tax Day 2021 has been moved to May 17th, as, like last year, the IRS extended the due date because of the pandemic. Most states (Colorado among them) have followed suit by moving their state income tax returns deadlines to May 17. 

Barring a few exceptions, though, Tax Day has fallen on or just after April 15 since 1955! So, In celebration of what most Americans know as Tax Day, we’re talking taxes and retirement planning. If you’ve ever wondered why so many people retire in Florida or asked yourself “What is the best U.S. state for retirement?” this is for you.

Deciding Which U.S. State to Retire in - Priorities for Retirees

Whether you’re thinking about moving to a new city, state, or even considering moving abroad, deciding where to live in retirement is a big decision. Should you move to a tax-friendly state for retirement? Taxes have a big effect on retirees. So naturally, this is one of the first questions that come up when considering a new home.

You often hear about people moving to Texas or Florida in retirement thanks to mild winters, no state income tax, and relatively affordable housing—never mind that Texas is blazing hot much of the year and Florida experiences regular hurricanes. The two states regularly top “Best Places to Retire” lists. However, lesser-known places like Michigan and the coastal Carolinas are popping up more in recent years.

In any case, a proper tax management strategy for retirement is multi-faceted and considers all possible financial effects. Here are the major types of tax implications you need to consider when it comes to choosing your home state in retirement: 

Retirement Account and Pension Income  

Since these will likely be your main sources of income, how a state handles retirement and pension account income is a major factor for retirees. In most states, retirement account withdrawals, such as from a 401(k) or IRA, are fully taxed. There are seven states which do not tax withdrawals from retirement accounts: Wyoming, Florida, Alaska, Georgia, Mississippi, South Dakota, and Nevada. Pension income exemptions are much more common, with only nine states fully taxing income from government pensions, and 16 taxing private employer pension income. 

Social Security Benefits

Good news: most states do not tax Social Security benefits in any way, and many allow for exemption of at least some Social Security income. North Dakota, Nebraska, Rhode Island and West Virginia are the only states which tax all Social Security income at the federal level.

Median Property Tax Rate

While owning your home is a good way to lock in housing costs at a fixed rate, property taxes can change significantly from one year to the next. If the real estate market in your area is booming, you can bet your property taxes will go up. 

Annual costs for property taxes can also vary wildly from state to state, which means you should calculate before you move. Many states, including Colorado, offer property tax exemptions (or “homestead exemptions”, check the terminology for your state) for homeowners over 65.

State and Local Sales Tax 

It’s easy to forget about sales taxit’s not like you get a tax bill in the mail for your retail purchases. But it definitely adds up over time. So be sure to calculate your average combined state and local sales tax rate (this calculator can help) Did you know that four statesOregon, New Hampshire, Montana, and Delawarehave no state or local sales taxes?

Estate Tax or Inheritance Tax

Inheritance and estate taxes affect property that's passed on to loved ones. Estate taxes are levied on the value of a decedent's assets after debts have been paid. And with inheritance tax, the beneficiary of an estate is taxed on what they receive.

While Maryland is the lone state with both an inheritance tax and an estate tax, 17 states (and the District of Columbia) may tax you or your loved one’s estate or inheritance.

Colorado is Tax-Friendly for Retirees

If you’re in the Denver area and you want to stay for retirement, Colorado falls in a good spot on the tax list, with a reasonable income tax of 4.55% and no estate tax. The combined state and local sales tax rate is above the national average. On the upside, the state’s median property tax rate is the third-lowest in the nation. 

Actually, there are a majority of states that could be considered at least moderately tax-friendly based on these criteria. You can use this calculator to see how any state in the nation stacks up when it comes to tax friendliness for retirees. 

Consider the Big Picture - It’s Not Just About Taxes

There’s more to choosing your retirement destination than taxeslots more! As Certified Financial Planners and fiduciary advisors, we encourage you to use a wide-angle lens for your personal retirement planning.

Consider your financial goals and tax strategy. But also think about your lifestyle goals for retirement. What’s important to you when it comes to:

Of course, there are tradeoffs for every location. For example, Texas has some of the highest sales taxes and property taxes of any U.S. state. Yet it’s still a popular retirement destination because of other factors like the absence of state income tax, which means Social Security and all other types of retirement income are tax-free. 

Personal circumstances also play a role. For example, you might be willing to pay higher taxes on your home or your retirement income in order to be closer to your family. 

A financial advisor can help you plan for retirement and other financial goals. Financial advisors can also help with tax strategy, investing and financial plans, estate planning, and more, to make sure you are preparing for the future. And when you work with a fiduciary advisor, you can be sure they’re working for your best interests, not for kickbacks.

What kind of retirement lifestyle do you want? Retirement Secrets helps you figure that outand then helps you build a plan to make it happen. Order the book now.  

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