I admit it. Talking about taxes can be about as exciting as watching the grass grow or the paint dry. No one particularly enjoys paying taxes to Uncle Sam, and why would anyone, with the tax code getting more complicated with each passing year? The Tax Foundation finds that the U.S. tax code is now approaching 10.1 million words, which is good enough for 157 full-length novels. It's enough to make the average American swear off learning anything about the U.S. tax system.
Nevertheless, understanding how federal taxation can affect you is critical to all Americans -- especially those who are entering retirement or are already retired. Retirees these days are living longer than ever, with the average 65-year-old expected to live more than 20 additional years, according to the Social Security Administration. That means they need to ensure their nest egg is set up in such a way as to last throughout retirement. Investing and generating income through dividends, bonds, and CDs is one way to build wealth. But just as important is tax-planning, which reduces your taxable income during retirement.
Retirees have a number of tools at their disposal when planning for the future. Certain retirement tools, such as a Roth IRA, can eliminate your need to pay any tax on what you withdraw during retirement. However, where you live can play a big role, too. There are 50 states, and each approaches taxing its residents a bit differently. With factors such as sales tax, property tax, income tax, and even Social Security taxation to consider, not all states are created equally for retirees.
Retirees should be familiar with these tax-friendly states
With this in mind, here are five of the friendliest states for retirees when it comes to taxes. Note that these states may not be for everyone, but one or more may appeal to you and your wallet.
Sure, Alaska may have some pretty harsh winters, and its period of excessive daylight or moonlight might play tricks on your mind. But the Last Frontier State also comes with a host of benefits should retirees choose it.
To begin with, there are just two states in the U.S. that don't have an income tax or state sales tax, and Alaska is one of them. That means retirees who might want to do a little bit of work from time to time to boost their income, or those who have a penchant for buying things, will be in great shape.
Being loaded with oil reserves, Alaska also divvies out an annual check to its permanent residents from the state's oil wealth savings account. In 2015, the distribution came to $2,072. While Alaska does have an average property tax of around $3,000 based on median home value in the state, the oil distribution takes care of about two-thirds of the average resident's liability. Homeowners aged 65 and up, or surviving spouses aged 60 and up, also happen to be exempt from municipal taxes on the first $150,000 of assessed value of their property.
As icing on the cake, Alaska doesn't tax retirement income such as 401(k)s, IRAs, private or public pensions, and Social Security benefits, and it has no inheritance or estate tax.
If you're looking for something a bit warmer, the First State is always a good choice.
Delaware is one of the few states to have no state sales tax, and its income tax range of 2.2% to 6.6% is reasonably low. The high end of this income tax rate doesn't even kick in until $60,000 in earned income, which will exclude a majority of retirees.
Delaware is perhaps best known among retirees for its favorable property tax rate. Based on the median home value of $230,500, the average homeowner is paying just $1,224 in property taxes, or 0.53%. By comparison, New Jersey residents are paying nearly four times as much in annual property taxes as a percentage of median home value. What's more, homeowners aged 65 and up may be eligible for a credit equal to half of school property taxes, up to $500. There are some restrictions for newer residents who've lived in the state for less than three years, but retirees in Delaware get the prime treatment when it comes to property taxes.
In addition, taxpayers 60 and up in Delaware are allowed to exclude $12,500 of investment and qualified pension income each year. If you're over the age of 65, you also get an extra $2,500 standard deduction as long as you don't itemize.
Though there is no inheritance tax in Delaware, a maximum estate-tax rate of 16% may apply above $5.49 million in 2017.
Now if you want summer practically all year round, then Florida could be tops on your list of places to retire. Of course, you wouldn't be alone, since Florida is already among the most popular destinations for seniors.
Though Florida does have a state sales tax of 2.9%, along with localities that can add up to an 8% tax on top of the state levy, it also has no state income tax. That means folks looking to work part- or full-time could pocket more of their wages, which helps to balance out the relatively high average combined state tax rate of 7.5%.
Like the states before it, Florida offers a very favorable picture when it comes to the treatment of property taxes and retirement income. Every person who owns and resides in a Florida property on Jan. 1 of a given year, and makes that home his or her permanent residence, is eligible to receive a homestead exemption of up to $50,000. But seniors aged 65 and up who meet certain income requirements can receive up to an extra $50,000 homestead exemption. The average property tax in Florida is only about 1% of the median property value, working out to $1,631 a year.
Retirees should also like that retirement income of any form isn't taxed (that includes Social Security benefits), and the fact that the state has no estate tax or inheritance tax.
If you've reached retirement, but the thrill to let loose hasn't yet subsided, then retiring in the home of Sin City might just be for you, assuming you can handle the 100-degree summers.
Like Florida, Nevada does have a state tax rate that its residents are going to notice. There's a 5.5% state levy that goes alongside up to a 1.3% tax that can be added by localities. But, as has been a major trend with a number of states on this list, there's no income tax in Nevada.
Nevadans also get benefits with regard to property taxes and the taxation of retirement income. Though seniors don't qualify for any extra property-tax breaks, which is a marked break from the previous states, the average property tax assessment in Nevada is pretty low compared with the national average. With a median home value of $192,100, the average homeowner is handing over just $1,420, or 0.74%.
Retirement income isn't taxed in any form in the Silver State, either. Similarly, residents won't pay estate or inheritance taxes.
Last, but certainly not least, retirees should consider the picturesque Granite State, which makes up in scenery what it loses with inclement weather in the winter.
I noted earlier that there are just two states that don't have a state tax or income tax. Alaska was one, and New Hampshire is the other. There is one small caveat worth mentioning here, and it's that there is a 5% tax on dividends and interest in excess of $2,400 for individual filers and $4,800 for joint filers. If you're living off the income from your investment portfolio, you could owe tax in New Hampshire.
Perhaps the downside of New Hampshire, which is more a problem with the entire New England area, is that property taxes are nauseatingly high. The average New Hampshire resident will owe $5,131 based on a median home value of $236,400. However, an elderly exemption does exist for those aged 65 and up who've lived in the state for at least five years. To qualify, you'll need to have a total household income of $20,000 or less as an individual, or $40,000 or less as a married couple or head of household.
Residents in the state have none of their retirement income taxed, including Social Security benefits, and they, too, escape the inheritance and estate tax.
The only real question left is: Which state sounds like it could be the right fit for you?
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