When you retire, you may consider moving to another state — say, for the weather or to be closer to loved ones. State taxes also may factor into the equation.
Identify and Quantify All Applicable Taxes
It may seem like a no-brainer to simply move to a state that has no personal income tax, such as Nevada, Texas or Florida. But, to make a good decision, you must consider all of the taxes that can potentially apply to a state resident, including:
• Income taxes;
• Property taxes;
• Sales taxes; and
• Estate taxes.
For example, suppose you’ve narrowed your decision down to two states: Texas and Colorado. Texas currently has no individual income tax, and Colorado has a flat 4.63% individual income tax rate. At first glance, Texas might appear to be much less expensive from a state tax perspective. Not necessarily. The average property tax rate in Texas is 1.93% of assessed value, while in Colorado it’s only 0.62%.
Within the city limits of Dallas, the property tax rate is a whopping 5.44%. So, a home that’s assessed at $500,000 would incur an annual property tax bill of $27,200 if it’s located in Dallas, compared to only $3,100 in Colorado. That difference could potentially cancel out any savings in state income taxes between those two states, depending on your income level. Of course, there are other factors to consider in any move, including taxes in the exact locality in the state.
If the states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Excerpt from EHTC CPAs and Business Consultants Newsletter dated 1/12/2017