Many factors influence the decision of where to retire. Family, familiarity of surroundings, climate and cost of living are among the many factors that affect one’s choice of where to spend retirement years. What about state taxes? They are often overlooked and just “accepted” as an expense. However, for those with a keen eye for wealth preservation, state taxes are critically important in deciding where to live and ultimately retire.
The Best States Overall
The states with the best overall tax environments for high income and high net worth retirees are Alaska, Florida, Nevada, South Dakota, Texas and Wyoming, since they do not levy income, estate, inheritance or gift taxes. Also, they stack up well in most other tax categories, except for Nevada (high sales taxes) and Texas (high real estate taxes). New Hampshire is also very advantageous but collects income tax on interest and dividends. Other states also have favorable tax systems, but not in each tax category like the six noted above.
Other States Are Good Too for Unique Situations
Each retiree’s situation is unique and a satisfactory tax outcome may occur in states other than those listed above. For example, if a retiree has a lot of interest and dividend income, then Washington may be a good state to retire, since it has no income tax but levies an estate tax on persons owning above $2.193 million in total assets.
Retirees with a lot of IRA and tax qualified plan income should consider Alaska, Florida, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas and Wyoming, which do not tax such income and levy no estate tax. Since Illinois and Washington do not tax such income, they may also be favorable domiciles, unless their estate tax applies.
Estate Planning Considerations
Transferring wealth during life via gift is an important strategy to avoid federal and state estate taxes. Only one state – Connecticut – imposes a gift tax, but states like Illinois pull lifetime transfers back into the estate tax calculation so lifetime gift planning becomes tricky. Transfers during life are tax exclusive, meaning the recipient receives the full amount of the gift and the transferor pays the gift tax. Transfers at death are less tax efficient since they carry the tax burden along with the transferred asset, i.e. they are tax inclusive.
If estate taxes and inheritance taxes are a concern when planning the transfer of wealth, then pay close attention to the eighteen states that levy such taxes. The jurisdictions with extremely low exemptions, thereby causing more exposure to death taxes, include Massachusetts, Minnesota, New Jersey, Oregon, Rhode Island, Vermont and Washington making planning even more challenging for high net worth retirees.
There are other strategies to consider such as forming a trust while resident of a tax-favorable state and then moving on to another jurisdiction. Also, changing residency long before the sale of a business could result in significant tax savings. The changes brought about by the 2017 Tax Cuts and Jobs Act require a lot of thought to be given to strategies to preserve deductions for real estate taxes.
Plan for State Taxes!
The tax systems of the states are very different. A retiree’s type and amount of assets can generate widely different results in different states. If state taxes are a priority to a retiree, he or she must closely examine the type and amount of assets and determine which state provides the best overall tax result.
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.