estate planning lawyer Oak Brook, IL

What’s Retirement Got To Do With It?

In Uncategorized by Garrett, Walker, Aycoth & Olson, Attorneys at Law

Individuals began relocating in record numbers during the pandemic. Some moved to be closer to family, others for better weather. Still, others changed domicile for financial reasons, like the pursuit of different job opportunities, for lower taxes, or because they planned to retire. Folks desiring to relocate should consider the various taxes in the desired state of residence, especially when they are at or nearing retirement. It’s no secret that taxes vary widely from state to state. Some states may impose estate, gift, inheritance, or income taxes which could affect the decision to move. States diverge in their property and sales tax rates as well according to an estate planning lawyer with our friends at Bott & Associates, Ltd.

If the desired state of residence imposes an income tax, then the individual needs to determine what types of income would be subject to taxation and how it would affect their bottom line. States most friendly to retirees exclude Social Security benefits from taxation and provide exemptions for other common forms of retirement income, such as private pensions or Individual Retirement Accounts (“IRAs”). Additionally, states friendly to retirees have lower property and sales taxes to allow those on a fixed income to make the most of every dollar.

Eight states, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not impose a state income tax. This means that a retiree’s Social Security benefits, as well as other income, are safe from state income tax liability. Of course, that shouldn’t be the only financial factor considered. Of those eight states, Florida, Nevada, Tennessee, and Wyoming impose neither an estate tax nor an inheritance tax. Nevada provides another advantage with the seventh lowest median property tax rate of just over $572 per $100,000 of home value. Unfortunately, Nevada has a combined state and local sales tax rate of 8.23%. Wyoming provides both a low combined state and local sales tax rate (5.22%) and the eleventh lowest property tax rate at $605 per $100,000 of home value.

Arizona, Alabama, Colorado, and South Carolina impose a state income tax but none impose an estate or inheritance tax. Arizona, Alabama, and South Carolina all exempt Social Security benefits from state income taxes. Colorado exempts Social Security benefits from taxation at the state level if the retiree has attained the age of 65. South Carolina allows taxpayers aged 65 and over to exclude up to $10,000 of retirement income versus $3,000 for those under the age of 65. South Carolina also allows seniors to deduct $15,000 from other taxable income as well. Colorado’s combined state and local sales tax rate comes in at 7.77% and its median property tax rate is $505 per $100,000 of home value. South Carolina bests Colorado slightly with a combined state and local sales tax rate of 7.44% but has a slightly higher median property tax rate of $566 per $100,000 of home value.

Alabama may require seniors to pay a bit more in income tax than retirees in other states because it taxes IRA and 401(k) distributions. While those facts may weigh against a move to Alabama, its median property tax rate is the second lowest in the country at $406 per $100,000 of home value. Its average combined state and local sales tax rate is a bit high at 9.24%, but it allows anyone over the age of 65 to exempt the state portion of property taxes and allows lower-income residents an exemption from all property taxes on their principal residence.

Interestingly, a recent Kiplinger article rated Hawaii and Delaware as the number 2 and number 1 states, respectively, for retirees. Even more shocking, Florida, a state known for its large retiree population failed to make its top ten list. Perhaps less shocking, New Jersey ranked as the least retiree-friendly state with its state income tax rate ranging from 1.4% to 10.75%, it’s average combined state and local sales tax rate of 6.6%, and its median property tax rate of $2,741 per $100,000 of home value. Kiplinger based their rates on the sum of income, sales, and property tax paid by two hypothetical retired couples, both with modest assets and income levels.

In addition to considering the potential estate, gift, inheritance, income, sales, and property taxes imposed by a state, individuals desiring to relocate should consider the types of ownership the state acknowledges, for example, community or separate property, and the nuances of property ownership in that state. The property ownership and nuances of the state of residence prior to the relocation may also impact estate planning in the new state. As this article makes clear, the decision to move involves complex considerations regarding more than just location. Of course, retirees will want to consider weather, crime, and proximity to friends and family. A qualified estate planning attorney can help demystify these complex considerations; contact one near you for help today.