Don’t neglect state taxes when considering retiring and relocating


Below are some considerations if you’re thinking of retiring and relocating to a state with low tax rates or that offers special tax benefits to retirees.

State income taxes in general
There are seven no-income-tax states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. (New Hampshire and Tennessee impose income tax only on interest and dividends).

State income taxes and Social Security
Social Security income is completely exempt from tax in 28 of the states with an income tax (as well as the District of Columbia): Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, and Wisconsin.

Some states (Connecticut, Kansas, Missouri, and Montana) don’t’ tax Social Security benefits if income is less than a specified dollar amount (Nebraska joins this list in 2015). Colorado, Utah, and West Virginia provide a general income exclusion or credit for seniors that take Social Security into account. Most of the remaining states tax Social Security benefits to the same extent they’re taxed under federal law.

State income taxes and retirement income
Of the states with an income tax, most provide at least some relief for retirement income, but this can range from a credit of less than $500 (Ohio and Utah) to an exclusion for all or most retirement income (Hawaii, Illinois, and Mississippi). Only a handful of states, including California, Nebraska, North Carolina, North Dakota, Rhode Island, and Vermont currently tax all retirement income and don’t provide any general income exclusion for seniors.

Some states exempt public pensions, but tax private pensions; or exempt public pensions earned in that state, but not public pensions earned in another state. Some states exempt employer retirement benefits, but not IRA income. Others exempt a specific dollar amount of retirement income, but only if you’ve reached a certain age or have income within certain limits. In some states, military pensions are partially or fully exempt, while in others they’re fully taxable. Check your state’s Department of Revenue website for more information.

Can the state I’m moving from tax my benefits?
What happens if you spent your working life in a state like California that fully taxes retirement income, but you relocate after retirement to Florida, a state that has no income tax? Can California tax your pension benefit? Federal law clearly prohibits states from taxing certain retirement income unless you’re a residence of, or domiciled in, that state.

The law applies to all qualified plans (for example, 401(k), profit-sharing, and defined benefit plans), IRAs, 403(b) plans, 457(b) plans and governmental plans.

The law provides only limited protection for other (nonqualified) deferred compensation plan benefits. “Top-hat” plan benefits that are paid over an employee’s lifetime, or over a period of at least 10 years, are covered by the law. However, stock options, stock appreciation rights (SARs), and restricted stocks are not; states are free to tax these benefits even after you relocate.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

Speak Your Mind