Ah, retirement. A little golf. Some travel. Occasional visits from the grandkids. Taxes.
Yes, taxes. Even after you've traded in nine-to-five for more relaxing pursuits, you need to think about taxes. In fact, post-career tax considerations could be more crucial than ever, especially in deciding where to retire. From Alaska to Florida, state taxes vary considerably.
"The baby boomer generation is coming into retirement on the heels of one of the worst economic downturns in decades," says attorney Kathleen Thies, state tax analyst with CCH, a tax software and publishing company in Chicago. "What they have to pay in taxes can have a significant impact on their finances and overall cost of living in their retirement years."
But determining exactly how taxes might affect retirement is quite complex, says Holley Ulbrich, an economist and senior scholar at Clemson University's Strom Thurmond Institute in Clemson, S.C.
"Depending on one's income, housing choices and spending habits, the average tax burdens may not be relevant to a retirement decision," says Ulbrich.
Bankrate's state tax map provides a breakdown of the many types of taxes levied by individual states.
For most workers, income taxes are the major tax concern. So it's only natural that it's the tax that retirees also tend to think about first when picking a retirement home.
No problem, right? Nine states don't have an income tax. But before you call the moving van and change the mailing address for your pension checks, take a closer look.
Accounting for only a state's income tax structure is a little misleading.
"The general perception is that I'll move to a state like Florida with no income tax, and that will be a big benefit," says Thies. "But Florida has to make up its revenue somehow."
And in the majority of states and the District of Columbia that do collect some type of income tax, most provide retirees a break as well. They either don't tax Social Security or exempt the benefits, at least to the same extent as the federal government does.
States tend to be a little tougher when it comes to taxing private pension benefits. Most tax at least a portion of pension income. Of the states that tax income, only Pennsylvania and Mississippi completely exempt pension income.
Still, the state taxes might not be that bad.
"It depends on your income situation. I live in one of the states with an income tax, but (it) also is one of the most favorable in treatment of pension income," says Ulbrich. Her state doesn't tax Social Security and exempts a certain amount of pension income.
You also might want to stay put if you live in one of the five states that don't have a sales tax or your state and local sales tax rates are low. In the other 45 states and the District of Columbia, the recent trend has been to increase sales taxes.
Vertex, a Berwyn, Pa., firm that calculates sales tax rate changes, tallied 522 new or increased local, state and county sales tax rates in 2010, compared with just 33 decreases last year.
The company also found that last year's average U.S. combined sales tax rate, that is, the total of state, county, local and special purpose tax district collections, was 9.64%. That's a full percentage point higher than in 2009, and it is the highest sales tax rate Vertex has recorded since it began its annual calculations in 1982.
Retirees living on fixed incomes are particularly hard hit by sales taxes because they are regressive. A regressive tax effectively means that lower-income individuals pay a greater proportion of their income than higher-income groups pay.
In order to ease the regressive nature of sales taxes, many states exempt certain products, such as food, from the tax. But to make up for such nontaxable goods, states might opt to collect on other things, such as services.
"Older persons are more likely to consume services," says Ulbrich. "They need more help with things such as landscaping and household upkeep."
Property taxes also are a major source of revenue. The largest base here is real estate taxes, which are driven locally, usually at the county level to pay for schools, so you have to be aware of your area, says Thies.
Overall, though, says Thies, real property taxes have gone up even though the economy has stagnated.
No worries. You're selling the big family home and renting in a senior community so property taxes won't be a problem, right? That depends.
Several states have classified property tax structures, says Ulbrich, meaning that tax collectors have found more to target than just real estate. "Property taxes are collected in many places -- on boats, cars and other motor vehicles -- and it might be relatively high," she says.
So check out a state's and its local jurisdictions' property tax systems before you head to that lakeside retreat with that big, and potentially tax-costly, fishing boat.
Finally, don't forget the ultimate collection: estate taxes.
The Economic Growth and Tax Relief Reconciliation Act of 2001 phased out the federal estate tax in 2010. It was reinstated in 2011 and will be in effect at a maximum tax rate of 35% on estates worth more than $5 million through 2012.
As the estate tax was phased out, it cost the state treasuries that piggybacked their collections on the federal law. Some states, however, were unwilling to forgo this revenue source and decoupled from the federal law, thereby retaining or reinstating their estate taxes. Most of these states also impose the tax on much smaller estates than the federal law does.
The current federal estate tax law expires again at the end of 2012. Legislatures in many states are waiting for Washington, D.C., to take presumably final action on the federal law before they move on their estate taxes, says Thies.
Some states also impose an inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska (county level), New Jersey, Pennsylvania and Tennessee. While an estate tax is collected on the assets left by a decedent, an inheritance tax is imposed on assets a beneficiary receives.
If you choose to retire in a state with an estate or inheritance tax or both, you should get the advice of an estate specialist so you can arrange your assets and enjoy your retirement without worrying about its eventual tax cost to your family.