Small Business Taxes & Management^TM--Copyright 2014, A/N Group, Inc.

Introduction

Where's the best place to retire? Obviously, that depends on a number of factors. Can't stand the heat? Florida may not be the best choice, despite the fact there aren't any income taxes. Those articles that give you a list of the 10 best places to retire are based on overall factors. They may not fit your particular circumstances. We won't discuss every point you might want to consider. Instead this article is intended to give you some things many people don't evaluate before calling the movers.

Personal Requirements

While low taxes may be an important consideration, first consider nontax issues. Here's a list of some items.

Climate. Everybody from the Northeast moves south to escape the cold, right? For the most part that's true, but what about you and your spouse? Is it that big a factor? Or would you just rather escape the worst of winter and avoid hot and humid summers. Finding an inexpensive rental for the winter may not be that difficult. Have a medical issue that may be affected by the region? Moving to Arizona may not make much sense if you have skin conditions.

Medical. Healthy? Expect to continue to be? Proximity to hospitals and doctors may not be a big factor. Need a specialist? Trust only your current doctor(s)? Insurance coverage is another factor. If your choice of doctors is already limited, finding one you like to take your insurance can be an important issue.

Housing Prices. Much depends on what you're looking for. In some markets, particularly those that are within commuting distance of a major city, land can be a very significant portion of the purchase price. In rural areas that's much less true. Have to have a vegetable garden? Need waterfront for your boat? Some areas are clearly cheaper than others. Housing upkeep can be another factor. The North is saddled with high heating costs--but you probably won't need central air in the summer. The reverse is true down South. You may not be able to survive without air conditioning for a significant part of the year. Live in northern New York? You may never have had a termite or other bug problem. On the other hand, in some southern states a monthly visit from the exterminator is not an unusual expense. Best advice here is to do your homework carefully.

Other Costs. We assume that many of the goods and services we buy are priced the same around the country. While that's true for many items, it's not universal. Food prices can vary considerably. Like farm-fresh? You'll pay a premium if you're living in many cities. Services also tend to be more expensive in cities. There are other cost variations.

Taxes

You can't just look at one part of the picture here. While income taxes can be important, they're often only a portion of your total tax bill. In some cases, the smallest portion. Here's the list.

Real Estate Taxes. They could easily be the biggest share of your taxes. Some states with low income taxes make up for the difference with higher real estate taxes. We know two adjoining states where the taxes for a house in one state can be $10,000 and that in a neighboring state, while only a few miles away, those for a comparable property can be less than $4,000.

More than a few states have "circuit breakers" for senior citizens. That's often a reduction or credit for seniors with residences appraised below a certain amount and/or where the owner's income is below a certain amount. There may be other tax breaks. In rural areas you may be able to have a portion of the land valued as farm or conservation land. Veteran's exemptions, reductions for volunteer fireman or EMTs, etc. may also exist.

Sales Tax. How significant a factor this is obviously depends on how much you spend. Often it's just one item to put in the mix. But just comparing rates shouldn't be the end of your analysis. What's taxed can vary greatly from state-to-state. Most states exempt medical supplies and food. Some exempt clothing, many don't. Most that have a sales tax impose a tax on any nonexempt goods. But some states have a broad tax on services; some don't. That can be a big factor. If the auto repair bill comes to $1,200 with $1,100 in labor and $100 in parts a state with a 6% tax on both will hit you for $72; one that exempts services will charge only $6.00. Since services account for a significant part of many budgets, it's a factor to consider.

Income Tax. This is where it gets tricky. You can't just compare rates. While many states start out with federal adjusted gross income, most modify that by adding and subtracting certain items. For example, Alabama allows you to deduct your federal income tax. (That's unusual.) Other adjustments are more common.

The tax rate in Massachusetts is only 5.25%, while the highest rate in 8.82% (2013). But the Massachusetts rate is a flat amount; the New York rate applies to income over $2 million. The top rate on income over $154,350 is 6.65%.

But the biggest difference is itemized deductions. New York allows the federal itemized deductions, with the exception of state and local income taxes (and the sales tax if deducted on your federal return). Massachusetts doesn't allow federal itemized deductions, but does allow up to $2,000 for amounts you and your spouse (if married) paid to Social Security. In addition, you get a $3,600 (vs. $1,000 for New York) deduction for dependents. The question is, how much are those deductions worth? If you have no mortgage interest and your real estate taxes are low, you may end up with the New York standard deduction of $7,500 ($15,000 for married).

There's more. New York has a host of credits and special deductions. Whether any of them will apply is another matter. And most other states also have incentives. The question is, which will you be able to take advantage of them?

But the big difference in New York is that Social Security benefits that may have been taxed on your federal return are exempt. And the first $20,000 (per person) of any pension is exempt. Federal and New York state, county, and local employee pensions are fully exempt. More than a few retirees escape income tax completely.

If you're retired, dividend, interest, and capital gain income may constitute a large portion of your income. Check the tax rules for this income in any state you're evaluating.

Done by hand, this analysis is tedious and error prone. Fortunately, comparing states with a computer is relatively easy. If you've prepared your own return, buying extra states is usually about $25-30. Chances are your CPA has access to any state. But before doing anything, you'll need pro forma numbers. Using last year's return could be misleading if you had large capital gains or losses. You'll need to come up with the income and deductions you expect to have in retirement. If you're going to consult a CPA, the summer is a good time.

You may not be able to avoid taxes in your old home state simply by moving. Income from rental properties, an LLC or S corporation operating in the state will still require you to file a return and pay tax on that income.

You should be aware that a tax can be imposed on property in a state with such a tax. For example, you own several rental properties in New York. You die in Florida. Your estate will have to file an estate tax return in New York.

The rules here vary widely. Consult a professional.

--Last Update 05/29/14