Income Tax-Free States May Be Worth Considering for Residency in Retirement

12 Oct

Income Tax-Free States May Be Worth Considering for Residency in Retirement

There are a number of states – such as Florida, Nevada and Texas – that do not tax income that have received an increasing amount of interest after the new federal tax law passed in 2018 capped state and local tax (SALT) deductions at $10,000. There are currently nine states that do not tax the income of residents.

States with No Income Tax

Below is an overview of the states with no income tax, according to Fox Business.

Alaska

  • In addition to not having an income tax, Alaska has no sales and use tax, generally. Though, local jurisdictions have the right to levy sales and use taxes.
  • According to a study by WalletHub, Alaska has the lowest tax burden of any of the 50 states – at a cumulative 5.1 percent. The average property tax burden is 3.66 percent

Florida

  • In addition to no income tax, the effective real estate property tax rate in Florida is 0.98 percent, according to data from WalletHub.
  • The sales tax rate, generally, is 6 percent. However, localities can collect their own sales taxes, too, for a maximum rate of 8.5 percent

Nevada

  • Despite not having an income tax, Nevada has a high sales tax rate of 4.6 percent. Though, it can reach as high as 8.265 percent in certain localities. As a result, the total sales and excise tax burden is the second-highest of any state besides Hawaii.
  • Property taxes are relatively low, at about 2.24 percent, according to WalletHub.

South Dakota

  • The sales tax rate in South Dakota is 4.5 percent, but can reach as high as 6.5 percent depending on the rates in different localities.
  • The average property tax burden is 2.87 percent.

Texas

  • In addition to no state income tax, Texas has no state property taxes. Though, property is taxes through local taxing units.  
  • Even though the Lone Star state does not have a state income tax or state property tax, it imposes a 6.25 percent state sales tax and local jurisdictions have the ability to impose up to 2 percent sales and use tax for a combined top rate of 8.25 percent.

Washington

  • It may have no income tax, but Washington makes up for that loss of revenue in other areas. For example, the state sales tax is 6.5 percent, but rates in certain localities can exceed 10 percent. In addition, the average property tax burden in the state is nearly 2.6 percent.

Wyoming

  • Despite not having an income tax, the state imposes a fairly high property tax rate of 4.32 percent.
  • The sales tax rate ranges between 4 percent and 6 percent.

Watch Out for Higher Taxes on Other Investments in Income-Tax Free States

If you are planning to move to an income tax-free state when you retire, be cognizant of the fact that some states attempt to recoup revenue by taxing other investments. Most notably, New Hampshire and Tennessee tax investment income and interest. This is important since, if you are retired and not working, you may be more reliant on your investment income.

A similar strategy is applied in other states where there is no income tax, but the states have much higher sales and/or property taxes. For example, Nevada has a fairly high sales tax on groceries, clothing and other goods, according to Bankrate.com.

Do Not Let Taxes Dictate Where You Decide to Reside in Your Golden Years

The overall tax burden on residents in a particular state is an important consideration, but it should not dictate where you ultimately decide to reside when you retire. There are a variety of factors that you should analyze when assessing whether to move and where to move when you decide to stop working.

To help, Kiplinger created one list of the best states to live for retirees. Kiplinger’s rankings analyzed important factors such as living expenses, health care costs, poverty rates, and the economic wellness of the state, according to World Population Review.

According to Kiplinger, South Dakota is highly ranked for retirees since the cost of living is 4 percent below the national average, health care costs are below average, and it is one of the most fiscally sound states in the United States. Hawaii is also at the top of the list since health care costs are manageable and the overall economic wellness of the state is strong.

Georgia is another highly ranked state for retirees since the cost of living is 7 percent below the national average and state taxes are manageable.  Here is Kiplinger’s list of the top 10 states for retirees:

  • South Dakota
  • Hawaii
  • Georgia
  • North Dakota
  • Tennessee
  • Alabama
  • Virginia
  • Florida
  • New Hampshire
  • Utah

Speak to a Trust and Estate Planning Attorney To Discuss Your Long-Term Goals

As you can see, there are a variety of factors to consider when you are contemplating the best plan for your life post-retirement. To ensure you make the best decision, it is prudent to speak with an experienced and knowledgeable trust and estate planning attorney at InSight Law. Our law firm offers clients a detailed, workable plan that emphasizes the importance education, not only for our clients, but their loved ones as well. We also provide a continuing maintenance plan to make sure client’s estate plans fit their changing lives and provide protection for their families in the future.