Federal taxes will be the same no matter where you move for retirement; however, state and local taxes vary among states. A lot depends on your financial situation before deciding where to retire for the best tax savings. If you do your homework before making a decision to relocate and follow a few basic suggestions, you will come to a sound decision on where to go to find the best retirement tax savings.
Research sales and property taxes. Do not get overly enamored with the idea of retiring to a state that does not have state income tax without first checking sales and property taxes. You don’t want to later learn that sales and property taxes have offset your state income tax savings. Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax; however, Oregon was considering charging sales tax at the time of publication. Some states exempt food and medicine from sales tax, while other states tax every penny you spend.
Research tax consequences of your pension before retiring. Although most states exempt a portion of pension income, public and private pensions may be taxed differently. California, Rhode Island, Connecticut and Nebraska charge high taxes on pensions.
Research states for income tax on Social Security benefits. Many states are moving away from taxing Social Security; however, some states make up to 85 percent of Social Security benefits taxable. Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia tax Social Security benefits to a certain extent. Some states like Kansas and Missouri are phasing out taxing Social Security income.
Check Kiplinger's web page for retirees to research tax retirement issues for each state (see Resources).
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