Relocating In Retirement, Here Is Why You Need To Consider Your Taxes First

When an affluent suburban Chicago couple informed John Campbell, senior wealth strategist at U.S. Bank Private Wealth Management, that they planned to retire in New Mexico due to its climate and lower income and property tax rates, he began comparing the tax burdens of the two states.

He determined that Illinois would be less expensive for this couple. Illinois does not tax Social Security or retirement payouts, but New Mexico charges both. The couple opted to keep Illinois residences for tax reasons while living in New Mexico part-time.

Expenses are important in retirement, and the allure of a state with no or lower income taxes might be powerful. But, according to financial consultants, retirees should look at overall taxation, which includes sales and property taxes, which are often higher in jurisdictions with no income tax. Retirees may discover that relocation is not the cost-saver they anticipated.

If you wind up paying an additional 4%, 5%, or 6%, your purchasing power is diminished, says Campbell.

What will your sources of retirement income be?

In addition to Illinois, eleven additional states do generally not tax withdrawals from retirement accounts. Popular retirement destinations such as Colorado and New Mexico and nine other states tax Social Security. Moreover, Campbell says that retirees relying on dividends and interest should investigate how their state regards this income. He observes that New Hampshire, which has no income tax, taxes these payments by 5%. This, however, will expire in 2027.

Property Taxes Can Be a Burden

High property taxes are a potential source of revenue for states without an income tax, and Texas is a prime example.

According to the Tax Foundation, the national average is 0.90% of assessed house value, but the Texas average is 1.6% or more.

The homestead exemption in Florida regulates homeowners’ property tax growth rate; the exemption is lifted if a residence is sold and the property taxes are reassessed. Because house values in Florida have climbed substantially over the past few years, the assessed value is likely to be much greater than in the past, resulting in higher property taxes.

While the new homeowners can petition for a homestead exemption, it will be based on the higher assessed value of their property. The property taxes of out-of-state buyers should be calculated based on the home’s assessed worth, not what the previous owner paid.

It certainly might surprise folks when they move into their house to find out their taxes are significantly higher, says Michael Wagner, chief operating officer at Omnia Family Wealth in Miami.

Don’t Forget Sales Taxes

Tennessee has no individual income tax, but the state sales tax is a hefty 7 percent, and local governments can add 2.75 percent. Robert Gilliland, managing director of Concenture Wealth in Houston, observes that the maximum Texas sales tax rate is 8.25%.

The minimum sales tax in Florida is 6%, and counties can add 1.5% for a maximum of 7.5%. Wagner states that sales taxes are the primary source of income for Florida, which has a high sales tax due to its extensive tourism industry.

Gasoline taxes 

Gasoline taxes and the quantity of driving a person may do in their new state may be a surprise. The American Petroleum Institute places the gas tax in Illinois at 59 cents per gallon, Florida at 43.5 cents, and Texas at under 20 cents per gallon. But, because Florida and Texas are so dispersed, persons moving to those states may purchase significantly more fuel.

From one side of Houston to the other may take you up to an hour and a half, adds Gilliland.

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