Thursday, February 18, 2010

Tax Issues Confront Retirees

Although retirement is a time to relax, planning for your retirement can be stressful and difficult. However, by doing a little research you can make the most out of your retirement. Market Watch has put together a helpful article explaining tax issues related to retirement, and what states are better to retire in. You can find a snippet of their article below.

As you enter retirement, probably the largest and most daunting expense you encounter will be taxes. And we're talking not just of a benign single item of expense, but quite possibly many different kinds of levies. Each one of our 50 states can enact and enforce state and local taxes by the dozen, as well as property taxes by the hundreds, and countless more.

These taxes can vary so much in size and scope from place to place that they sometimes become key factors in your decision of where to retire -- indeed, whether you choose to retire at all.

People who retire to low-tax or no-tax states have an economic advantage over those who do not. But only nine states have no broad-based state income tax. Those states are: Alaska, Texas, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming. (In New Hampshire and Tennessee, income tax is limited to dividends and interest income.) See this Federation of Tax Administrators page for more details on state tax rates.

One means to determine which state is the least costly in terms of total taxes is to check a study called "Tax Freedom Day." That's the day on which the ordinary American's total federal, state and local tax bill is fully paid from his or her earnings for the year to date. Ostensibly, this is the day you stopped working for the government and started working for yourself; that is, the day you earned enough to pay your federal, state and local taxes and are now starting to make money you'll be able to spend on things for yourself. For more on Tax Freedom day, visit the Tax Foundation site.

In recent years, states posting the worst Tax Freedom Days; that is, the highest overall tax bills have included Maine, New York, Ohio, Minnesota and Hawaii. And states with the lowest overall taxes have included Alaska, New Hampshire, Delaware, Tennessee and Alabama.

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