5 Retirement Destinations With Key Tax Advantages
Choosing where to retire can be largely dependent on where your money will go furthest. However, it isn't as simple as moving to a state with no income tax.
In a recent YouTube video, financial advisor Kevin Lum said many retirees actually focus on the wrong metrics and should take the time to evaluate their entire tax situation before moving. Below, we'll explore why he noted that, "Before you rank a single state as better for taxes, you need to understand your situation."
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Factors Every Retiree Should Consider Before Moving
Lum recommended evaluating four key tax categories before relocation in retirement:
How the state taxes retirement income, including Social Security, pensions, and IRA or 401(k) withdrawals
Property taxes, since some states with no income tax may make up the difference through higher property taxes
Sales taxes, especially if you’re living on a fixed income
Estate or inheritance taxes if you plan to leave assets to family members
5 Most (and Least) Tax-Friendly States for Retirees
According to the video, the five most tax-friendly states for retirees are:
Florida: The state of Florida has no state income tax, relatively low property taxes, no estate tax, and reasonable sales taxes. Lum warned, however, that rising homeowners insurance premiums can offset those tax savings.
Wyoming: Consider Wyoming due to no income or estate tax, as well as its status among the nation's lowest property taxes and low sales taxes.
Nevada: Nevada has no income tax, low property taxes, and no estate tax (although sales taxes are higher than average).
South Dakota: While South Dakota has strong tax advantages overall, it's one of the few states that still taxes groceries at the full sales tax rate.
Tennessee: With no income or estate tax and low property taxes, Tennessee is a great option even with relatively high sales taxes and taxes on groceries.
On the opposite end, here are the five least favorable states from a retirement tax perspective, according to Lum:
New Jersey: The Garden State has really high property taxes and an inheritance tax affecting some heirs.
Connecticut: Certain retirees may be taxed on Social Security benefits. Connecticut also has high property taxes and an estate tax.
Vermont: Vermont taxes retirement income and Social Security while also imposing relatively high property and estate taxes.
Minnesota: You won't escape Social Security and retirement income taxes retiring in Minnesota. The estate tax there also begins at relatively modest wealth levels.
Rhode Island: Rhode Island taxes Social Security for higher-income retirees, has a low estate tax exemption and above-average property taxes.
Why Low-Tax States Aren't Always Cheaper
The biggest takeaway from Lum’s video is that tax rankings can be misleading if you don’t consider your tax situation. For example, even though Texas has no state income tax, your property taxes could almost double if you’re a retiree from California by losing California's Proposition 13 assessment protections.
In other words, a state's tax friendliness depends on much more than its income tax rate. Other taxes like property taxes, sales taxes and estate taxes can all affect your cost of retirement. So before packing up and moving your entire life across the country, take the time to explore the official state tax data from the Tax Foundation website, which compares income, property, sales and other state taxes to help you make a more informed decision.
At the end of the day, "There's no universal best state," Lum said. "There's only one that fits your situation, your income, your home [and] your spending.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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