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Digging Deeper on Where to Retire Thumbnail

Digging Deeper on Where to Retire

By: Mike Earl

Here at The Wealth Group, we have a number of retired clients that maintain residency in warm-weather states with lower income tax burdens than Minnesota. Florida is by far the most common state to which our Minnesota clients transplant, but we also see clients establish residency in places like Texas, Arizona, Colorado, and Tennessee.

For any of our clients considering a change in residency (or domicile), our first piece of advice to them is not to have tax considerations be the primary driver of the decision-making process. In other words, if your children and grandchildren all live in Minnesota, you don't mind the cold all that much, and life in Minnesota is generally quite suitable to you, we would tell you not to uproot yourself for 6+ months a year just to save money on taxes.

On the other hand, if you easily envision yourself living at least 6 months per year in another state, there are a number of factors to consider. For many people, the extent of their tax consideration is to review which states have no income tax, as follows:

While the state income tax rate is a critical piece of the retiree tax puzzle, it is not the entire story. It is easy to forget the myriad ways state and local governments can increase their collection (or confiscation?) of our hard-earned dollars. Other taxes that must be considered are property taxes, state sales taxes, and local taxes.

Oh yes, there are also gasoline taxes, spirits taxes, wine taxes, beer taxes, cell phone taxes, and taxes every time you book a flight.

Thus, in order to take the analysis deeper, we must also consider property taxes and sales taxes. JPMorgan has created this remarkably useful visual illustration (please note the model assumptions on the right side of the chart):

The disclaimer here is that each person's tax situation is unique. This particular example assumes a fairly typical "millionaire next door" client.

There are a number of striking observations to be made from this chart:

  • Texas is in the third-worst category here, in the 10 - 13% range. So, in spite of having no state income tax, Texas may not be a great location to retire (speaking of the tax environment strictly). Why is that?

    • Texas has the 6th-highest effective property tax rate, clocking in at 1.67% of the property value. For example, a $300,000 home in Texas would carry property taxes of more than $5,000 per year.

    • Texas has the 12th-highest combined rate of state and local sales taxes, at 8.17%.

  • Colorado comes in as one of ten states in the "top tax friendly" category, even though the state does assess income taxes.

    • Colorado keeps things clean and easy with a 4.63% flat income tax for all federal taxable income. No brackets to mess around with.

    • Colorado has one of the lowest property tax rates in these United States, with an effective tax rate of 0.59% of the housing value (Minnesota is nearly double that rate, at 1.09%).

  • Not surprisingly, Florida holds true to form as one of the most tax friendly states for retirees.

  • Arizona, like Texas, registers in the third-worst category, with tax burdens for this hypothetical retired couple of between 10 - 13%.

When you dig in to the dollars paid in taxes (for this hypothetical retired couple), you see that a state like Georgia really looks attractive to this couple, with total state taxes payable of around $5,000. This is where nuances in the tax code really come into play, as Georgia has some unique exemptions for retirees.

We hope this helps bring you a broader perspective on the "where to retire" question from a tax perspective. Of course, a crucial part of what we do for our clients is income tax planning. We can run complex state-specific tax projections tailored to your personal retirement income situation.

Lastly, we also consider estate taxes (aka death taxes) for our high net worth clients. States like Minnesota have made their estate taxes less burdensome than in the recent past, but there are many states in these United States offering lower estate tax burdens than the Land of 10,000 Lakes.

Further reading: Kipinger's 10 Most Tax-Friendly States for 2016