September 30, 2023

Illustration by Sam Island

When an affluent suburban Chicago couple approached John Campbell, senior wealth strategist at US Bank Private Wealth Management, planning to retire in New Mexico because of its weather and low income- and property-tax rates, Campbell discussed the tax-burden. Started digging up the differences. between the two states.

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They found that Illinois would be cheaper for this particular couple. That’s because Illinois doesn’t tax distributions from Social Security or retirement assets, while New Mexico taxed both at the time. The couple decided to live part-time in New Mexico, while maintaining Illinois residency for tax purposes. Since then, New Mexico has exempted Social Security from taxation for couples earning less than $150,000 per year.

Cost matters in retirement, and the temptation to live in a state with no income tax or a low income can be strong. But advisors say retirees should pay attention to total taxation, which includes sales and property taxes, both of which are often higher in states with income taxes. Retirees may find that moving is not as cost-saver as they thought.

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“If you pay an extra 4%, 5% or 6%, your purchasing power goes down,” says Campbell.

Here are four things to consider before going into retirement.

What will be your sources of income in retirement?

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Illustration by Sam Island

Besides Illinois, 11 other states generally do not tax retirement distributions. Most states don’t tax Social Security, but popular retirement destinations like Colorado and New Mexico, as well as nine other states, do. Campbell also suggests that retirees who will be dependent on dividends and interest should look at how the state treats this income. He notes that New Hampshire, which has no income tax, levies a 5% tax on those payments. However, it is due to expire in 2027.

property taxes can sting

Illustration by Sam Island

States with no income tax have to get their revenue somewhere, and high property taxes are one potential source. Texas is a case in point.

According to the Tax Foundation, the national average is 0.90% of the appraised home value, and the Texas average is 1.6% or more.

Florida has a homestead exemption, which limits rapid increases in property taxes for homeowners. Once a home is sold, the exemption is removed and the home is reassessed for property taxes. Because home prices in Florida have increased significantly over the past few years, the assessed value is likely to be much higher than before, which means higher taxes.

While new homeowners can apply for their own homestead exemption, it will do away with this higher property-tax value. Out-of-state buyers need to see what their property taxes will be based on the home’s assessed value, not what the previous owner paid.

“It can really surprise people when they walk into their home to find their taxes are due,” says Michael Wagner, chief operating officer of Omnia Family Wealth in Miami.

don’t forget sales tax

Illustration by Sam Island

Tennessee has no personal income tax, but its state sales tax is a high 7%, and municipalities can tax another 2.75%. Robert Gilliland, managing director of Houston-based Concenture Wealth, noted that Texas’ sales tax could exceed 8.25%.

Florida also has a high sales tax, at least 6%, and counties can tax another 1.5%, up to a maximum of 7.5%. Wagner says sales tax is the main way Florida collects revenue, and it has a high consumption tax because it’s such a heavily tourism state.

The Gas Tax Case for Heavy Drivers

Illustration by Sam Island

Gas taxes and the amount of driving a person can do in their new state can get cut unexpectedly. The American Petroleum Institute puts the Illinois gas tax at 59 cents per gallon, Florida at 43.5 cents and Texas at just 20 cents. However, because Florida and Texas are so spread out, people moving there can buy a lot of gasoline.

“Quite frankly, it could take you an hour and a half to get from one side of Houston to the other,” Gilliland says.

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