Retirement and Taxes

Are all states equal when it comes to taxes and retirement?  The answer may surprise you and may have you double thinking where it is you want to spend your retirement years.  Regardless of where you live everyone will always owe and pay federal income taxes.  Depending on what types of retirement accounts you will have will determine how much in federal taxes you will pay.  Social Security while not 100% taxed may be taxed to some degree at the federal level.  The accumulated portion of an annuity, withdrawals from traditional IRAs, 401(k) plans and pensions will be taxed as ordinary income.  Taxable brokerage accounts will indeed be taxed but at rates that are generally better than those of straight income with a maximum of 20% for dividends and long-term capital gains.  Of course any withdrawals from ROTH accounts are tax free.  As you can see just because you retired does not mean the federal government will not get its fair share of taxes.  With proper planning federal taxes can be reduced but rarely do they go away completely.  Personally I do not see taxes going down in the future so proper planning in this regard is essential so consider using a financial planner to assist in your asset allocations and locations.

As for state taxes in retirement you will need to do some homework on your state and any state you are considering living in during your retirement years.  Not all states tax people in retirement in the same manner.  Currently there are nine states that have no income tax at all with two of them only taxing dividends and interest.  But that does not mean that the other 41 states are not tax friendly for retirees.  Again do some research on a state by state basis and compare things such as income taxes, sales taxes and property taxes.  Those combined with each state and city’s standard of living need to be considered.  Mississippi and Pennsylvania are the most retiree friendly as they do not tax any retirement income including public and private pensions.  Many of the remaining states offer some degree of tax breaks for retirees while six offer no tax breaks at all.

Most states are much more generous when it comes to taxing Social Security than the federal government.  On a federal level Social Security benefits may be taxed at rates up to 85% and in many states these benefits are 100% tax free.  As states become more and more dependent on internal revenue to make up deficits this may change over time and states may begin taxing these benefits.  Besides the nine states that already have no income tax an additional 27 and the District of Columbia do not tax Social Security benefits.  The remaining states do tax these benefits to some degree.  Here it is very important to check the tax codes of the state you are living in or thinking of moving to.

While most of us do not have to worry about estate taxes as the personal exemption is $5.34 million and that doubles for a married couple states can be vastly different.  Many states do not have an estate or inheritance tax 19 states and the District of Columbia have one or the other.  Maryland and New Jersey actually impose both of these taxes.  The difference between these two taxes is an estate tax is paid by the estate before assets are distributed and an inheritance tax s paid by the heir of the assets.  Like income taxes and taxes on Social Security benefits check your state’s tax code to see what the tax implications on these two taxes are for you.

With a little planning most of these taxes can be limited but maybe not entirely eliminated.  If you are concerned about the tax implications seek a tax professional or a financial planner for assistance.

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