Financial Security

What Kind of Damage Is Your State Doing To Your Retirement Nest Egg?

Sooner or later we all eventually get around to thinking about retirement.  There are so many things to consider.  Weather, being close to family, availability of medical care and other services, housing expenses, etc.

Given that taxes are the largest expense that most households have to deal with, it makes sense to add that to the list of things to consider.  The types and amount of taxes are just mind boggling.

If you are lucky, you may be “only” paying a third of your money to the many forms of government in the United States (city, county, state, federal) before you have the chance to do anything fun or productive with it yourself.

But for the average American house-hold, we are talking about a tax burden well in excess of 50%.  This includes items such as state tax, property tax, airport tax, alcohol tax, city tax, sales tax, public utilities tax, estate tax, telephone tax, automobile registration tax, etc.  Wow!  And these “tiny” taxes add up to a significant amount over and above any base federal taxes.  Yes, even in retirement.

Kiplinger has analyzed the tax impact that you will encounter in retirement and published an article about the 10 states that impose the highest taxes on retirees.

“Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes—and how generous are the property-tax breaks for seniors? Are Social Security benefits taxed? What about other forms of retirement income—including IRAs and pensions? Does the state impose its own estate tax that might subtract from your legacy? The answers might just determine which side of the state border you’ll settle on in retirement.”

The top 10 least tax-friendly states for retirees are:

  1. Vermont – “The Green Mountain State doesn’t coddle retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont treats Social Security benefits the same way the federal government does, which means as much as 85% of your benefits could be taxed.”
  2. Connecticut – “The Constitution State is a tax nightmare for many retirees.  Its real estate taxes are the fourth-highest in the nation.”
  3. Minnesota – “Pensions are taxable regardless of whether they are military, government or private pensions. Income tax rates and the sales tax rate are high.”
  4. Oregon – “One bright spot in Oregon’s tax picture: no sales tax. You can buy anything in the state and never pay a penny in sales taxes.”
  5. Montana – “Montana taxes most forms of retirement income, including Social Security benefits, and its 6.9% top rate kicks in once your taxable income exceeds a modest $17,400.”
  6. California – “At 7.5%, state sales taxes are the highest in the country, and local taxes can push the combined rate as high as 10%.  Residents of the Golden State pay the third-highest effective income tax rate in the U.S.”
  7. Nebraska – “Nebraska taxes most other retirement income, including retirement-plan withdrawals and public and private pensions. And the state’s top income-tax rate kicks in pretty quickly.”
  8. New Jersey – “The Garden State’s tax policies create a thicket of thorns for some retirees.  Its property taxes are the highest in the U.S.  New Jersey is one of only a couple of states that impose an inheritance and an estate tax.”
  9. New York – “New York allows localities to impose an additional income tax; the average local levy is 2.11%, per the Tax Foundation.  The Empire State also has some of the highest property and sales tax rates in the U.S.”
  10. Utah – “The Beehive State joins our list of least tax-friendly states this year.  Utah offers few tax breaks for retirees. Income from IRAs, 401(k)s, pensions and Social Security benefits is taxable at the 5% flat tax rate”

So, there you have it.  As I started out, the tax-friendliness of your retirement state is just one of the factors that come into play.  One final dose of reality is that the United States in general, and many states (including those on this list), are facing significant financial problems, which may result in increased taxes and/or reduced services.

To find out more details about the states on this list, click on the link below.  Oh, yes – the article is set up as one of those “slide shows”.  If you are like me and do not like that format, then look just below the first bit of text and the page numbers and you will see a light grey link that says “VIEW AS ONE PAGE”.  Click on that and you are on your way!

www. kiplinger.com

 

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