Moving to an area with a lower cost of living in retirement could make your savings last longer. But as you consider the cost of living in potential retirement destinations, don’t overlook the impact of state taxes on your bottom line.
Scoping out state taxes is particularly important now because even though the new tax law lowered federal taxes for millions of people, taxes in some states could go up.
Most states use federal definitions of income — either taxable income or adjusted gross income — as the starting point for determining how to tax their residents.
And even though the federal tax overhaul lowered tax rates and doubled the standard deduction, it also expanded the amount of income that’s taxable by the feds, mainly by eliminating personal exemptions. At the state level, that could trigger taxes on a larger percentage of residents’ income.
Several states, including Georgia, Iowa and Missouri, enacted laws during the 2018 legislative session that lowered tax rates and implemented other measures to prevent state taxes from rising. But lawmakers in several other states are still debating how to adjust their tax codes.
One way to avoid this problem is to move to a state that excludes all or a significant portion of your retirement income from state taxes. Six of Kiplinger’s 10 most tax-friendly states for retirees have no income tax at all. The remaining four exclude from state taxes all or most of residents’ income from retirement plan withdrawals, pensions and annuities.
At the other end of the ledger is Minnesota, which tops our list of least tax-friendly states for retirees. Minnesota is one of a handful of states that taxes a portion of Social Security benefits.
3. South Dakota
8. New Hampshire
6. New Mexico
Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org.