Kitces on retiree state taxes

[USGrant1962]

Michael Kitces has done another interesting article. He goes through the typical retiree income sources (SS, pension, IRA/401(k), taxable investments) and analyzes how each state treats them for state income tax purposes.

Then he gives some examples and heat maps for retirees with different levels and sources of income. Even includes a spreadsheet summarizing how each state taxes retiree income.

https://www.kitces.com/blog/state-i...ocial-security-pension-income-age-exemptions/

Lots of interesting results. Like NY and NJ are not bad at all for moderate income retirees (neglecting property taxes, though).

 

[jim584672]

Surprising results actually. Being lower to middle income in NY isn't the worst. And that study didn't consider property taxes breaks for age and low income which NY has.

 

[Winemaker]

Kitces has always done great work and analysis.

 

[braumeister]

Without going into detail, I'm very familiar with the taxability of my retirement income and that article is mostly wrong when looking at my state.

So nobody should take it at face value.

 

[foxfirev5]

To me it's all relative. While I spend quite a bit of time split between Michigan and Florida I see no need to "relocate to avoid income taxes" . This year the amount we spend at Publix in Florida is about 25% higher than our local Michigan grocery. That just about equals our Michigan income tax. Factor in property taxes and insurance and I'm glad to buy a dozen Delta tickets and come and go as I please.

 

[MissMolly]

Without going into detail, I'm very familiar with the taxability of my retirement income and that article is mostly wrong when looking at my state.

So nobody should take it at face value.

How is it mostly wrong? Aren't you in KY like me? It appeared correct to me.

 

[Gumby]

Without going into detail, I'm very familiar with the taxability of my retirement income and that article is mostly wrong when looking at my state.

So nobody should take it at face value.

I can tell you that he is right about Connecticut. If you are MFJ and under $100k AGI, your SS, pension and (soon to be) tIRA withdrawals are income tax free here in the Nutmeg State. Sadly, the young wife and I are over the $100k cliff even without drawing from the tIRA.

 

[W2R]

To me, the implications of articles like these are that one should at least consider the relative tax burden of a state when deciding where to retire.

As much as I despise paying taxes (who doesn't?), I must reluctantly point out that using info like this to decide where to live, is letting the tax tail wag the where-to-retire dog. In other words, cost of living involves a lot more than taxes and it could be cheaper to live somewhere with higher taxes, if other expenses are much lower.

 

[GravitySucks]

Great article.

I started managing my income for ACA last year and paid $0 NY income taxes plus received a small rebate on last years property tax this year. (Property taxes in my county and school district are pretty high though.)
After 65 I will qualify for a minor cut in school and property taxes, although income taxes will pop until I take SS at 70

 

[Chuckanut]

Be aware that the income tax situation in Washington state is in flux.

https://dor.wa.gov/taxes-rates/other-taxes/capital-gains-tax

The state has just instituted it's first income tax (though they call it an excise tax). It is on capital gains and currently only applies to gains over the $250,000 standard deduction.

The state Supreme Court has been asked to rule on its constitutionality. If the SC Ok's the tax, some of its advocates have made it clear that they will go for a more general income tax at the state level and perhaps also at the local level.

The 2021 Washington State Legislature recently passed ESSB 5096 (RCW 82.87) which creates a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets.
This tax only applies to individuals. However, individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets. The tax only applies to gains allocated to Washington state.
There are several deductions and exemptions available that may reduce the taxable amount of long-term gains, including an annual standard deduction of $250,000 per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns.
The tax takes effect on Jan. 1, 2022, and the first payments are due on or before April 18, 2023.

In March of 2022, the Douglas County Superior Court ruled in Quinn v. State of Washington that the capital gains excise tax (ESSB 5096) does not meet state constitutional requirements and, therefore, is unconstitutional and invalid. The State has appealed the ruling to the Washington Supreme Court. While the appeal is pending, the Department will continue to provide guidance to the public regarding the tax as a courtesy. Any guidance provided herein will apply only if the tax is ruled constitutional and valid, in its entirety, by a court of final jurisdiction.

 

[levindb]

States need money to do the things they do. They get money via:

1. Income tax (wages, investments, social security, pensions/IRA/etc.)

2. Property tax

3. Sales tax

While it is important to understand each of these when choosing where to live, be careful that you do not focus on just one of these when looking at your tax burden. You should also factor in the general Cost Of Living in that state, but be careful not to double count these taxes when looking at the Cost Of Living...although they can be related. Sales tax, for instance, may be related to how much you spend in that location.

It is a very complicated process to compare the tax component of living in a state...not a simple Excel spreadsheet.

 

[USGrant1962]

States need money to do the things they do. They get money via:

1. Income tax (wages, investments, social security, pensions/IRA/etc.)

2. Property tax

3. Sales tax

While it is important to understand each of these when choosing where to live, be careful that you do not focus on just one of these when looking at your tax burden. You should also factor in the general Cost Of Living in that state, but be careful not to double count these taxes when looking at the Cost Of Living...although they can be related. Sales tax, for instance, may be related to how much you spend in that location.

It is a very complicated process to compare the tax component of living in a state...not a simple Excel spreadsheet.

True, the subject article is only about income taxes. A lot of people will suggest that all states are the same - they just get the money in different ways. Tax Foundation does detailed analysis showing the total tax burden as percent of, basically, state GDP.

https://taxfoundation.org/tax-burden-by-state-2022/

This analysis is in no way what a specific individual pays, but is a good analysis of what the entire state population pays. And they are not about the same across different states. The article notes that it is sort of a bell curve with many states clumped about the middle. But the outliers on both ends are real. New York does have over twice the total tax burden of Wyoming or Tennessee (leaving out AK because the oil tax revenue thing is weird).

 

[jldavid47]

Michael Kitces has done another interesting article.

...

Lots of interesting results. Like NY and NJ are not bad at all for moderate income retirees (neglecting property taxes, though).

Sorry, but any retiree tax analysis that excludes property taxes is worthless. We moved from the Chicago area to Central Indiana in 2014. This year we will pay about $500 in state income taxes to Indiana. If we lived in Illinois we would pay nothing. However, the property taxes on our house in Illinois would be a bit north of $10,000. Here (for a similar home) it is $3,300. So, we're paying $500 more in income taxes but saving (at least) $6,700 on property taxes. I'll happily pay a little in Income tax to save that much on property taxes. This year alone we're about $6,200 ahead on that trade off and that continues year after year. YMMV

 

[jebmke]

Interesting details. In the case of Maryland, it appears he has not included the county income tax overrride which can be 40-50% of the state tax rate; so someone with a 5% state tax rate may be paying 7+% in total and he is only counting the 5.

 

[USGrant1962]

Sorry, but any retiree tax analysis that excludes property taxes is worthless. We moved from the Chicago area to Central Indiana in 2014. This year we will pay about $500 in state income taxes to Indiana. If we lived in Illinois we would pay nothing. However, the property taxes on our house in Illinois would be a bit north of $10,000. Here (for a similar home) it is $3,300. So, we're paying $500 more in income taxes but saving (at least) $6,700 on property taxes. I'll happily pay a little in Income tax to save that much on property taxes. This year alone we're about $6,200 ahead on that trade off and that continues year after year. YMMV

Well, it is a state retirement income tax analysis and doesn't claim to be anything else. In most states there is nothing to analyze about "retiree" property tax. Everyone pays the same level of property tax except for some homestead exclusions, Prop 13, and such. These are generally not related to being retired or not (unlike taxation of SS, pension, IRA, etc.).

Of course there are a handful of states where 5-digit property taxes occur on normal houses - and some states have almost 10% sales tax, or local income taxes, or property tax on cars, etc. etc.... See my other post about total state and local tax burden. Not to mention COL, amenities and proximity of friends and family. Hopefully one wouldn't consider moving just for state retirement income tax purposes?

 

[thefinancebuff]

Michael Kitces has done another interesting article. He goes through the typical retiree income sources (SS, pension, IRA/401(k), taxable investments) and analyzes how each state treats them for state income tax purposes.

The article is published on Kitces's website but it wasn't written by Kitces. Let's give credit where credit's due.

 

[Sunset]

OP - thanks for posting this, it's an interesting read.

Here in IL, it seems to be accurate about State taxes.
While IL seems rosy as retirement income and SS is tax free for IL, the real estate tax is the 2nd highest in the country and the sales tax is very high as well.

I've thought about moving, just for income tax purposes (combined with real estate taxes and cost of living).

 

[Gumby]

OP - thanks for posting this, it's an interesting read.

Here in IL, it seems to be accurate about State taxes.
While IL seems rosy as retirement income and SS is tax free for IL, the real estate tax is the 2nd highest in the country and the sales tax is very high as well.

I've thought about moving, just for income tax purposes (combined with real estate taxes and cost of living).

What is your mill rate for real property tax?

Ours here in Connecticut vary by which of our 169 towns or cities you live in. They range from 11 to 74. (1.1% to 7.4% of assessed value.) Assessed value is supposed to be 70% of market value at the time of the last reassessment (required by law every 5 years). So we pay from 0.77% to 5.2% of market value every year. The lowest mill rates are in the wealthy rural towns that have no municipal services (no fire department, no police department, regional school districts) and high property values. The highest mill rates are in the large, poor cities with low property values.

I pay about 1.9% of market value every year in my generally middle class city of 50k people. It just so happens that our reassessment was last October, so that value is used for this year's taxes and the next four, regardless of what the housing market does in the interim. The mill rate will change yearly depending on the City budget.

So, yes, you could have zero income tax if you retire here, but you'll still pay property tax if you own a house, although you could choose where to live in order to minimize that. There are also credits against your property tax if you are low income (<$45,800 AGI for MFJ) and over 65.

 

[braumeister]

Ours here in Connecticut vary by which of our 169 towns or cities you live in.

A sometimes overlooked detail, as statewide averages seldom tell you the whole story.
I pay property taxes to both county and city. The county rate is just under 1% and the city rate is roughly half of that. I would pay considerably more if I lived a block over, which is in a better school district.

 

[EastWest Gal]

I agree with the discussion regarding property taxes. It's a good analysis of income tax, but income tax only. The other major tax is property tax, which he completely ignores. The mil rate for us in central PA is 1.6% and is unchanged in 20 years here. Around Philadelphia it is much higher.

California has a progressive tax, like the federal tax. Another feature of California is property tax is quite low, due to Prop 13, which was modified somewhat in recent years. The property values are very high in many areas. But if you are a long time owner, or inherited your property from your parents, your property tax can be insanely low, much lower than a mil rate of 1%. The townhouse we sold in 1998 for $360K is now worth over $1.5M, but had we kept it the taxes would be based on 1% of our purchase price with a max of 2% increase each year. Had we kept it and rented it out, our real estate tax would currently be about $5200, or a mil rate of 0.3%. The mil rate on our California orchard was about 0.5%, but one of my cousins transferred his share to his sister and that quarter share got taxed at current property value, increasing the mil rate to about 0.7%. Still it's a bargain.

 

[ExFlyBoy5]

Without going into detail, I'm very familiar with the taxability of my retirement income and that article is mostly wrong when looking at my state.

So nobody should take it at face value.

It was also spot on for my state.

 

[jldavid47]

Well, it is a state retirement income tax analysis and doesn't claim to be anything else.

That's exactly my point.

In most states there is nothing to analyze about "retiree" property tax. Everyone pays the same level of property tax except for some homestead exclusions, Prop 13, and such. These are generally not related to being retired or not (unlike taxation of SS, pension, IRA, etc.).

Within a state that is true but these types of analyses are focused on comparing between states. At that point there is plenty to analyze for retirees.

 

[FiveDriver]

I know the article was accurate for South Carolina at the State Level. The Palmetto State is very tax-friendly to retirees.

Our Property Tax is very low also. I appealed our Prop Tax last time the re-assessed us. The Assessor's Office was so swamped with appeals.....they just rubber-stamped everybody who submitted Comps (even my low-ball Comps). I'm good for the next 4 years, and considering our location, we are getting off easy.

One thing that must be considered in Charleston County. There's a tax on all hotel stays and restaurant meals -- they let the tourists fund their budget. There's also a hefty tax on booze in CHS, which is why I drink Sweet Tea with a meal in Charleston.

BTW -- The SC Gasoline Tax is one of the lowest in the country, kept our gas prices much lower than the national average.

 

[FANOFJESUS]

I have read many things like this. I think cost of living should be number one unless your income is very high. Am I wrong?

 

[Chuckanut]

A sometimes overlooked detail, as statewide averages seldom tell you the whole story.
I pay property taxes to both county and city. The county rate is just under 1% and the city rate is roughly half of that. I would pay considerably more if I lived a block over, which is in a better school district.

Property taxes are another big variable and can easily exceed state income taxes. Many states have provided for a property tax for seniors with more limited incomes. That needs to be included also. I was reminded of this when I saw the head guy of our county council on TV asking for another big property tax increase.