Considering Taxes in Retirement Location

Everyone knows the story of the Titanic. The “unsinkable” ocean liner struck an iceberg at 11:40 p.m. on April 14, 1912, and sank before dawn on the next day, resulting in the deaths of 1,517 people in one of the deadliest peacetime disasters in history.

Taxes can appear to be as simple as a chunk of ice floating in the water, but like an iceberg, there’s often a lot more under the surface. The table below shows the different rates of income tax, sales tax, real estate tax, and estate tax for Delaware, Florida, Maryland, Pennsylvania, Tennessee, and Virginia.

 

Income
Tax
Sales
Tax
Real Estate
Tax/$1000 Value
Estate
Tax
Delaware2.2-6.95%03.9535%**
Florida06-7.5%7.890***
Maryland2-9.45%6%7.7116%****
Pennsylvania3.07%6-8%14.690***
Tennessee0*7-9.75%6.960***
Virginia2-5.75%5%6.680
*Only dividends and interest are taxed
**Over $5,000,000
***Due to the phaseout of the federal estate tax credit, estate tax is not currently imposed
****Over $1,000,000

 

A quick comparison shows that the tax rates vary widely. You also can see that the amount you may save in one type of tax might be counteracted by a higher rate in another. What you don’t see is that even these rates will fluctuate greatly depending on other factors. In comparing the tax burden you might face in retirement, it quickly becomes obvious how complex and individualized the choice really is.

Published sales tax rates, for example, are often misleading because not all states tax “necessities” such as food and medicine, but county and local taxes may be “piggybacked” on top of state tax rates. It is equally misleading to compare real estate taxes without understanding the nuances: how assessments are calculated; what each state’s “homestead exemptions” or property relief for seniors might be; or that income tax rates will vary based on sources of income (including Social Security, railroad retirement, dividends, and interest).

However, if you are just thinking in general terms, research by the Tax Foundation could be a great place to start. The Tax Foundation, a nonpartisan educational organization, does an annual study of the tax burden per state. For each state, the Tax Foundation calculates the total amount of taxes paid by its residents, divided by the state’s total income, to arrive at an average percentage of the residents’ income that goes toward state and local income taxes. While this measure is imperfect because it ignores the tax consequences of individual lifestyle choices, it’s a good first impression of the tax burden on a resident.

Think of the Tax Foundation’s data as an index for comparison purposes in an otherwise complex and sometimes intentionally confusing arena. The Foundation’s most current data ranks Maryland as the 12th most expensive state in the nation. On the other hand, Virginia, despite having both income tax and sales tax, still ranked an impressive 33rd. However, this can be attributed to Virginia’s high per-capita income, rather than an ultra-low tax burden. Therefore, Virginia is not likely to be your low-tax choice for retirement. Florida is an attractive option, as its lack of income tax leaves it 31st on the list. Delaware ranked 23rd, and it has been at the top of other “tax friendly” lists such as Kiplinger’s.

Confused? You are not alone. We can help you to navigate the icy waters of taxation.