Are states With No Income Tax Good or Bad for Retirees?

While adding up the different types of taxes in a potential retirement destination is important, tax exemptions and deductions should also be considered. Most states offer personal exemptions for taxpayers and their dependents.
While adding up the different types of taxes in a potential retirement destination is important, tax exemptions and deductions should also be considered. Most states offer personal exemptions for taxpayers and their dependents.

When looking for a place to retire, active adults sometimes assume that a state without state income taxes will be a more affordable place to live. However, this is not always true. There are many factors that contribute to an active adult’s total tax burden.

Although there are some places where you will not have to pay state taxes, those same states could have higher rates when it comes to other taxes such as property tax or sales tax. For example, Wyoming has no state income tax, but its property taxes are among the highest in the country.

Consider An Area’s Total Tax Burden

 Before deciding on a retirement destination, it is best to consider the area’s total tax burden as part of its complete cost of living. This will give you a better idea of how far your retirement savings will last in your new home. Depending on your situation, lower income taxes may be less important than you initially realize. After all, living in a state that has no income tax may not be as much help once you retire and have less income.

Property tax is often an important consideration for relocating retirees. While the state will set maximum limits and certain regulations when it comes to these taxes, the actual rates are generally determined at a local level. This means that different cities in the same state may have different real estate tax rates. Some states may also have property tax breaks for retirees over a certain age. In addition to basic real estate taxes, some states have personal property taxes. These are taxes on property that is not real estate, such as cars, boats, motor homes, trailers, livestock, and farm equipment.

Most states also have sales tax, which can have a large impact on your cost of living. Some of these states have a single rate, but many allow local city and county rates added to the base sales tax. Certain items may be exempt from sales tax, including food, clothing, and prescription drugs. However, other items, such as cigarettes, may carry an additional tax.

While adding up the different types of taxes in a potential retirement destination is important, tax exemptions and deductions should also be considered. Most states offer personal exemptions for taxpayers and their dependents. States may also allow specific deductions, such as those for healthcare expenses. A few states even allow taxpayers to deduct some or all of their federal income taxes.

Retiring in a location that has no state income tax may be an affordable option, but only if your total tax burden is not increased in other ways. Consider the whole picture when evaluating tax-friendly states and you will be prepared to make an informed decision.

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