Money Sense: Taxes and relocating in retirement

As you consider where you want to live in retirement, Bank of America explains the ways your tax bill could change

You may dream of moving in retirement for any one of several reasons: warmer weather, plentiful golf courses or pickleball courts, affordable real estate, top-notch medical centers. But for many retirees looking to pick up stakes, taxes are a big reason one state wins out over another.

And that can be a smart way of thinking. “If you live in a high-tax state and are considering relocating in retirement, it could make financial sense to move to one that would reduce your tax liability,” says Vinay Navani, CPA and shareholder at WilkinGuttenplan.

A lot of people looking to reduce their month-to-month retirement expenses gravitate toward states without an individual income tax. Currently, seven states belong in that category: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming. Two more states — Washington and New Hampshire — do not tax personal wages. However, Washington has a capital gains tax for capital gains over $250,000 from the sales of stocks, bonds and certain other capital assets and New Hampshire taxes interest and dividend income in excess of personal exemptions.

“Of course, there are plenty of other reasons for people nearing retirement to explore relocating,” says Ben Storey, director, Retirement Research & Insights at Bank of America. “You may want to move closer to family or live in a warmer climate, for instance. But the financial implications of your choice should play a large role as you begin to plan your retirement budget.”

Before you start scanning the real estate listings for Fairbanks, Alaska, or Fort Worth, Texas, here are some tax-related factors you might want to think about.

You get less relief from high state taxes than you once did. The 2017 Tax Cuts and Jobs Act capped allowable state and local tax deductions, including property tax, at $10,000 (for individuals and married couples, filing jointly). “As a result, people who live in states with high taxes, such as New Jersey, New York or California, may no longer be able to deduct all of their state taxes paid on their federal return,” Navani says. Because of that, some are finding that they owe more in federal income tax.

Your cost of living could be higher in a low-tax state. “You cannot look at relocating in a tax vacuum,” Navani says. Look at the overall prices in the area where you are considering relocating — everything from utilities and groceries to healthcare costs and your car and homeowners insurance.

Low-tax states can make up for lost revenue in other ways that could impact your budget. Several of the states without an individual income tax compensate by implementing a higher state sales tax or other taxes, including taxes on necessities such as gasoline, or charging more for state services such as driver’s licenses or car registrations. Those hidden costs could have a real impact on your budget.

Local property taxes also vary widely — even within a state — and a state with low (or even no) income taxes may have pockets where homeowners are hit with relatively high property taxes.

“One way to get a clearer idea of the tax implications of relocating is to ask your tax professional to run a projection of what your tax picture might look like in the new location,” Navani suggests.

A new state might treat your retirement income differently. Above certain adjusted gross income levels (plus certain modifications), you could owe federal income taxes on a portion of your Social Security benefits. But at the state level, the rules vary, with some states matching the federal approach and others exempting Social Security benefits from state income taxes (often pegged to your total income).

Another potential tax issue to explore is how your new state might treat your pension payments for income tax purposes. Among states that collect income taxes, some states may exclude all or a portion of qualifying pension income from state taxes.

Your home state should play into your estate planning. Looking ahead to how your beneficiaries will fare, you may want to compare estate or inheritance taxes in your current and future home states. Most states do not impose these taxes, but in those that do, state taxes may kick in well before federal estate taxes will.

“In addition to talking to a tax expert, be sure to consult your financial advisor about the impact that relocating could have on your retirement strategy, as well as your bigger financial picture,” Storey adds. “Speaking with an advisor can help give you a sense of how your expenses and income could shape your lifestyle if you decide to move.”

For more information, contact Merrill Lynch Wealth Management Financial Advisor Jeffery D. Price of Price & Associates at [email protected] or (817)-410-4940.

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