5 State RETIREMENT Tax Considerations You're Likely Not Considering... (State Taxes Explained)

where you choose to live in retirement is a very important consideration if we're trying to optimize our retirement plan for instance the difference between living in a high tax state versus a low tax state can be a multiple hundred thousand dollar decision for your retirement and may even cost you a few percentage points when it comes to your probability of success score now the problem I see a lot of retirees run into is they just focus on a state income tax rate in order to make this decision on how tax friendly a state is well in this video today I'm going to talk about five additional considerations outside of that income tax rate that you should be considering in determining what state is best for your retirement on the screen I have a map of the United States that shows the top marginal state income tax rate in each given State and just looking at this from a service level we can see that some states are certainly more tax friendly than others for instance if we look at Minnesota New York Oregon and California we can see each of these states have a top marginal rate that's either in the double digits or pretty close to the double digits which is fairly expensive as a state income tax rate other states don't tax income at all such as Texas Tennessee Florida South Dakota Wyoming Nevada Alaska and so if we're just focusing on the income tax rates you might think looking at something like Tennessee is a great decision it's very tax friendly versus looking at a state like Iowa that has an eight and a half percent top marginal rate we would want to stay away from living in a state like Iowa and what I want to talk about in this presentation today is that the state income tax rate isn't the only rate we care about there is a certain cost to run a state now every state has different tax revenues based on the industries in that state but understand that if a state has a very low income tax rate they likely need to make up for the tax revenues in some other way now because of this we can't just focus on the state income tax we have to look at all different considerations in determining the overall friendliness of a given state for instance when we look at a top marginal rate we don't necessarily care about the top marginal income rate we care about the marginal rate on the income you're taking this is a very important distinction for instance some states have a very high state income tax rate on wages but have no state income tax rate when it comes to retirement distributions or pension distributions when I talk about retirement income I'm talking about withdrawals from 401ks as well as IRAs pensions are a different type of retirement income and I have that separated out here when I talk about these states that don't tax either of those sources for instance States like Illinois Pennsylvania Mississippi and Iowa Post 2022 will tax your working income but won't tax your retirement income and so when you're pulling from what is the largest retirement asset for most families those tax deferred accounts when you're pulling from those accounts in retirement Iowa Post 2022 is essentially the same as Tennessee because neither will tax that given income and two other states Alabama and Hawaii once again do tax your working income but won't tax pensions consideration number two is property tax and real estate costs so when we're minimizing taxes and choosing the right State ultimately we don't care what Avenue we're paying those taxes from we want to minimize the overall tax that we pay and so it wouldn't make sense let's say to move to a no income tax state and save a little bit on state income taxes if now we had a much larger property tax bill that offset these slight savings we'd have on a state income tax side we're better off Trying to minimize our overall tax bill through a bunch of different Avenues and what we'll see is some states that have low income tax make up for that low income tax by charging higher property tax rates now on the left-hand side of the screen I have a table that shows the lowest 10 effective tax rate States from a property tax standpoint we want a low effective property tax but we also don't want to have to pay a ton on a relative basis for the cost of that house as well for instance on that table you'll see that Hawaii is ranked as the lowest effective real estate tax rate but we you also see the median home value is quite high as well and so a small charge on a very costly home still leads to a fairly High property tax rate so we need to be thinking about both of those considerations but take a no income tax state like Texas it's ranked 45th in terms of the effect of property tax and let's just look at a quick example here let's say that we have a couple that's taking eighty thousand dollars worth of income in two states Texas versus South Carolina we know that Texas has those state income tax savings because it doesn't have any state income tax and South Carolina will generate some state income tax and so we're looking at eighty thousand dollars worth of income with a 250 000 home and let's say these buy equal homes in both of these given States well interesting enough when we look at South Carolina we will be paying a little bit in terms of our state income tax rate but then we save on the property tax rate and so the overall taxes being paid from these two Avenues would be about twenty three hundred dollars in terms of those state taxes if we compare this to Texas we wouldn't owe any tax on that eighty thousand dollars worth of income but we'd be charged a higher property tax rate and so you can see based on that higher property tax rate we'd actually end up owing more to the state if these were the only two variables we were looking at consideration number three does your state tax Social Security benefits for instance let's compare two states that are generally thought of as being high tax states Minnesota and California now California is thought of as the highest tax state but as you'll see in this example this is not necessarily the case for instance let's say we take a couple they're both over 65 and they have fairly large social security income coming in at sixty five thousand dollars and they pull another sixty thousand dollars from their traditional IRAs so they're taking 125 000 in income well on a state income tax basis if you live in Minnesota you'd owe about forty six hundred dollars in state income tax because Minnesota taxes Social Security benefits but in California where they don't tax Social Security benefits you would only owe 383 dollars in state and income tax and so despite California looking like the state that has the worst income tax we see in this specific situation that's not exactly the case and so looking at all sources of your retirement income and the tax on that retirement income is extremely important consideration number four is State estate taxes now right now most retirees never have to worry about hitting the federal estate tax limit but State estate taxes are a different story now here at Safeguard we're of the opinion that you should try to save on taxes on all of the wealth you've accumulated whether you're still alive or you pass on not just the wealth that you're going to use during your life again you've accumulated this wealth you've worked hard for this we want to save on taxes whether it's your money that you're going to use or you're going to pass it on to the next generation and because of this you need to be thinking about State estate taxes now there are two types of taxes to think about when you're passing money out of the Next Generation and estate tax is taxed on your estate before you pass it on in the Next Generation and is tax based on the state that you live lived in or passed away in the inheritance tax is charged on the beneficiary and will be charged based on the state that they live in now on the screen you'll see a map that shows states that have an estate tax and or an inheritance tax and there are some states that have a very tax preference retirement tax rate like Washington and Illinois but will charge an estate tax when you pass away so let's look at one of these examples let's take an estate that's fairly large when someone passes away here in 2022 it's a five million dollar estate and they're passing away in Washington now Washington is a no income tax state and so they didn't pay any taxes to the state while they were in retirement or while they were working but when they pass away they will owe quite a bit in taxes due to their estate tax now the estate exemption meaning the state deduction that this couple will receive is 2.2 million dollars in 2022 but if we plug in the additional estate that they have beyond that 2.2 million dollar exemption we see that they're going to owe approximately 361 thousand dollars in total estate taxes that's an effective tax rate of 7.2 percent on their entire estate and remember the estate includes not only all of their freely liquid retirement accounts cash and things like that but also there are other Capital assets properties and things like that as well so that ends up being a pretty hefty expense owed at the end of their life this may make a situation where this couple would have been better off in another state just because of that state estate tax at the end of their life and then finally the fifth consideration is state and local sales tax and so the government levies taxes in a number of different ways they can Levy taxes on the income you generate they can Levy taxes on the Investments and properties you own they can also Levy taxes on what you spend as well and so regardless of where we pay that tax remember our goal is to minimize taxes throughout your retirement and so if you're in a situation where you want to spend quite a bit in retirement have a fairly large discretionary budget you need to be thinking about local and state sales taxes as well now once again on the screen I have a map that shows the average sales tax you can expect to pay based on a given State and once again you'll see this kind of muddies the waters and determining what state is the most tax friendly for instance if we look at a situation where someone has a hundred thousand dollars worth of income in retirement and 50 of that income is spent on things that are subject to sales tax we will see that living in Oregon means that they're going to owe nothing for sales tax after all Oregon doesn't have that sales tax but living in Tennessee based on the average sales tax in Tennessee they're going to owe about four thousand seven hundred and seventy five dollars in taxes for Tennessee now depending on where in this exam example that income is generated from whether it's Social Security IRA distributions or Roth distributions we can see that this person is going to have a different tax rate living in each of these given States both on the income generation side but also the consumption side as well and both of these have to be considered in thinking about what state is most tax-friendly for you and so a critical consideration here is what portion of your income is consumption and discretionary base versus needs based for instance things like food and utilities will not be subject to a sales tax and so if you're just living on the essentials likely this is not going to be as big of a variable to consider but if you have discretionary income up and above the essentials this is certainly something you need to be considering to wrap this video up I want to also talk about some very important contexts as we think through these tax considerations the first is that choosing your ideal location is not all about taxes obviously there's a lot more important variables that may need to be considered in your situation for instance it might be worth paying these additional tax taxes if it means being closer to family and you really value family and value closeness to family if you end up moving to a state that saves you a little bit in taxes but you have to travel back to visit family you're likely going to generate more in additional costs from that travel than you would saving on those given taxes number two consider the second layer details in your decision making and that's really what this video has been about all the second layer decision making outside of just that core surface level income tax rate that most focus on number three flexibility allows for the best optimization and so if you were completely trying to optimize your ideal location what I would look at doing is actually spending a little bit of time in multiple places for instance maybe during a heavy Roth conversion phase you want to live in a state that doesn't either tax retirement distributions or doesn't have any state income tax at all at that point you can then shift to a state that maybe has lower property taxes and lower sales tax and so you ended up saving on the outflows of your situation in terms of those Roth conversions now you're saving on the expenses for the long run as well and then finally number four everyone's situation and goals are different this is why I couldn't get as detailed in this given video as I might like for instance if you're someone that has a lot of value held up in their house then property tax considerations are going to be more important if you are somebody that wants to pass on a huge estate to the Next Generation then thinking about estate taxes are very important so everyone's Focus will be slightly different and that's kind of the whole point of developing a financial plan it needs to be built for your situation now if you're someone that is interested in digging a little bit more into state taxes we actually have a video that talks about State estate taxes and the variations between each state now you can think about that in your retirement plan you can click on that video right here always remember you don't need more money you need a better plan thanks for watching we'll see you next week

Channel: Safeguard Wealth Management

Views: 551,648

Keywords: state income tax, state taxes, property taxes in texas, 10 tax friendly states to live or retire in america, tax friendly states, state estate taxes, state capital gains taxes, state retirement taxes, state social security taxes, state sales tax, state property tax, taxes in retirement, tax efficient withdrawal strategies, state retirement tax planning, tax planning strategies 2022, retirement tax strategies, retirement withdrawal strategy, tax on pension, tax free retirement

Id: uN4K3gGyEC0

Length: 12min 31sec (751 seconds)

Published: Sat Nov 05 2022