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Choosing your retirement destination based on taxes

Cash Flow and Retirement

If you’re contemplating retiring to another state, there are several factors to consider — for example, climate, proximity to family and friends, cultural attractions, housing costs, health care quality, and transportation access. Taxes may be another factor. But assessing a state’s tax-friendliness is less straightforward than you might initially think.

Look beyond income

Many people deem a state “tax-friendly” if it has a low (or no) income tax. But to understand the potential impact of a state’s tax laws you’ll need to look at the big tax picture and consider property, sales, estate, investment and other taxes.

It’s also important to consider your financial goals. For example, if your primary goal is to maintain or improve your standard of living, income and investment taxes may be most relevant. On the other hand, if you’re most concerned about leaving as much wealth as possible to your heirs, you may prefer a state with no estate or inheritance taxes. Of course, a few states offer the best of both worlds: No income tax and no estate or inheritance tax.

Sources of income may also factor into your decision. Will you continue to work or will you live off your retirement savings right away? Some states impose no income tax on wages but do tax interest and dividends. And a few states without an income tax have “intangibles” taxes based on the value of certain investments or other property. Even if a state has an income tax, it’s important to read the fine print. Certain types of income may be tax-exempt, such as Social Security, pensions or retirement account distributions.

Don’t overlook local taxes, such as property, sales, and even income taxes. These can vary dramatically depending on where you live in a state. And many budget-strapped cities and towns have raised these taxes in recent years to increase revenue.

Watch out for Multi-State taxation

Don’t assume that moving to a new state means that your old state’s tax laws immediately cease to apply to you. If you maintain a residence in the old state and continue to spend a significant amount of time there, it’s possible both states will impose their taxes on you. Most states provide tax credits to avoid double taxation, but those credits aren’t always available. Even if they are, they may not fully offset your increased tax.

To avoid or minimize the potential for multistate taxation, take steps to establish domicile and residence in the new state. A full discussion of these steps is beyond this article’s scope, but they include:

  • Buying a home,
  • Obtaining a driver’s license,
  • Registering your vehicles,
  • Registering to vote, and
  • Opening a bank account in the new state.

Even if you successfully change your domicile and residence, remember that many states apply their income, estate or inheritance taxes to property located in the state, regardless of the owner’s location. So, for example, if you move from State A, which has a substantial estate tax, to State B, which has no estate tax, you may remain subject to State A’s estate tax on real estate you own there. Potential options for avoiding State A’s estate tax may include selling the property and reinvesting the proceeds in State B or, depending on applicable law, transferring title to the property to a trust or LLC established in State B.

Do the math

Taxes usually aren’t the most important factor in deciding where to retire. But if they’re a concern, your tax advisor can help you compare various states’ tax-friendliness and show you how those taxes are likely to affect your retirement and financial planning goals.

The information provided is not written or intended as specific tax or legal advice. We are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.


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