Consider State Taxes When Deciding Where to Live in Retirement

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

Big tax benefit for IRA could disappear

Retirement accounts and estate plans may soon be taking a major hit from the Internal Revenue Service, if Congress decides early next year to change the rules on a tax strategy involving inherited IRAs that many families have used to their advantage for years.

Under current rules, people who contribute to an individual retirement account (IRA) and don’t need the money to meet retirement living expenses can pass the account along to their heirs. That money is then allowed to keep growing tax-deferred throughout the heirs’ lifetime, with minimal taxes due on withdrawals.

But the ability to stretch an IRA across generations could be coming to an end. The Senate Committee on Finance voted 26-0 in September to kill the “Stretch IRA” for non-spousal beneficiaries – which means the tax man could be collecting trillions of dollars of legacy wealth.

“This is going to be big,” said James Lange, a Pittsburgh- based tax accountant, attorney and author. “It’s not a done deal. … But in the past when you had a 26-0 Senate vote, the legislation always became law the next year.”

For the average American, the retirement account is the household’s largest source of wealth, second to the house, explained Jim Meredith, executive vice president of the Hefren-Tillotson financial advisory firm. “The ability to transfer that wealth to the second or third generation will fall away with this legislation.”

“Currently,” he said, “Congress has to wait about 40 years to get the assets in retirement accounts converted into income tax payments. If non-spousal beneficiaries must pay the tax bill off in five years instead of over their actuarial life span, there will be a huge windfall for the government.”

The Senate proposal will be included in a bill called the Retirement Enhancement and Savings Act and would require beneficiaries of an inherited IRA or other qualified retirement account to pay all taxes due on the account within five years of the owner’s death. The proposed law does not apply to surviving spouses, who may still spread the taxes due on the account across their life span or roll the money into another retirement account. The proposed rule also would not affect Roth IRAs because taxes on those accounts have already been paid with after-tax income by the account owner.

The total amount of money at stake is substantial. Total U.S. retirement assets were $24.5 trillion as of June 2016, up 1.3% from the end of March, according to the Washington, D.C.-based Investment Company Institute.

From the Detroit Free Press, 12-28-2016, P. A11