How to Find a Low-Tax Place to Retire

For most of us “retirement” means lounging in warm weather, relaxing, and never having to work again! None of us want to pay higher taxes now; so why would we in our retirement?

USnews.com shares an article that goes over major taxes and tax breaks you should take into consideration when deciding to retire: Social Security, Pensions, Income Tax, Property Tax and Sales Tax. Read what they had to say:

Social Security. Most states no longer tax Social Security benefits. Some 35 states don't require residents to pay tax on Social Security income, according to an analysis by tax publisher CCH. Missouri and Iowa are in the process of phasing out their Social Security taxes. And Kansas residents with adjusted gross incomes of $75,000 or less are exempt from paying taxes on their Social Security checks.

Pensions. The tax treatment of pension income varies considerably from state to state. Some states, such as Pennsylvania and Mississippi, exempt all pension income from taxes. Other states exempt a portion of specific types of pension income. In Michigan, for example, all federal pensions and public pensions from specific states are totally exempt from tax. Private pensions were tax-exempt up to $45,120 for individuals and $90,240 for couples in tax year 2009. "When the economy was doing well, pension tax thresholds were moving out further and further, but now we're seeing a freeze on these threshold amounts," says Kathleen Thies, a CCH state tax analyst.

Income tax. Retirees who haven't saved enough to finance their desired lifestyle may need to work during their golden years. If your retirement plans include a part-time job, take a look at state income taxes. Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. And two states, New Hampshire and Tennessee, tax dividend and interest income only.
Great advice: While states without an income tax can seem like an obvious choice for retirees, it's also important to look at property and sales taxes, which tend to be higher in income tax-free states. "If you're thinking of retiring in four different places, figure out the total tax cost in all the places and then you can make an effective comparison," advises Paul Erickson, a professor of accounting at Baylor University. "The property tax and sales tax could be higher than what you paid on income tax."

Property tax. The median property tax paid in the United States in 2008 was $1,897, according to a Tax Foundation analysis of Census Bureau data. But taxes paid ranged from a median of just $188 in Louisiana to $6,320 in New Jersey. "Most states give residents over a certain age some type of a break on their property taxes," says Rob Shrum, state affairs manager for the Tax Foundation. Some counties in Florida, for example, allow permanent residents age 65 and older within certain income limits a tax exemption of up to $50,000 of the value of their primary residence. Widows and widowers also get an extra $500 property tax exemption in Florida. Contact a state's department of revenue to inquire about property tax breaks for seniors.

Sales tax. Many cash-strapped states have been increasing their sales tax to raise needed funds. Seven states increased their sales tax rate in 2009, according to Vertex Inc. research. The average sales tax rate in the United States now stands at 5.5 percent. It may also be worth looking at the types of items and services that sales and excise taxes apply to. "Typically elderly people will be purchasing less cars or furniture or big-ticket items than someone with a growing family, but they still need to purchase food and clothing," says John Minassian, vice president of content development for Vertex Inc.

There are five states that levy no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. States with low taxes for shoppers include Colorado (2.9 percent) and Georgia, Hawaii, Louisiana, New York, and Wyoming (all 4 percent). California has the highest sales tax in the country at 8.25 percent in 2010.

The Public Pension Bomb

States all over the country are running into problems with the retirement funds setup for their employees. CNNMoney.com recently posted an inn-depth article on how this problem is playing out now in New Jersey. You can find a segment of the story below, or read the full post here.

For years, states all across the country have been starving their retirement plans. Here's a look at how the crisis is playing out in New Jersey, where the bill is coming due, and the state doesn't have the money to pay it.

Even as the nation's economy is showing some tentative signs of bottoming out, another calamity looms: the public pension bomb.

For years, states nationwide have shortchanged the retirement programs that cover teachers, police, and other public employees; now the stock market plunge has wiped out billions of dollars from already underfunded plans. California, New York and Illinois are among the states scrambling to plug multibillion-dollar holes in their pension systems. The growing obligations raise the specter of higher taxes, diminished services, or even another round of costly federal bailouts.

"States have long needed to reduce their unfunded liabilities, and widespread investment losses have made it even more necessary to put money in," says Lance Weiss, author of a 2006 Deloitte study of state pensions. "But the market crash also means there's less money available to use for contributions. Everything is coming together to create a crisis."

To better understand this ticking time bomb it helps to focus on a single state, and New Jersey makes a compelling case study. For one thing, its situation is dire. In June 2008 the state estimated that the plan - one of the nation's largest, covering teachers, state employees, firefighters, and police - had $34 billion less than it needed to meet its obligations. Since then the market value of the plan has dropped from $82 billion to $56 billion (a new estimate of underfunding is due in July).

Also, New Jersey is in some ways ahead of the pack in trying to deal with the crisis - Gov. Jon Corzine, a Democrat, made addressing the problem a central theme of his 2005 campaign - and the obstacles it is encountering shed light on the hard choices facing other states.

"The pension obligations could spark a huge problem for New Jersey," says Thomas Kean, a former Republican governor. "They must be paid because they are absolutely an obligation of the state, but as it is, the budget is balanced with chewing gum and sealing wax."

To figure out how such a wealthy state (with a median household income of $65,933, New Jersey ranks No. 1) dug itself into this hole, set the clock back almost 20 years.

In 1990 the country was hit by a recession, and the new Democratic governor, James Florio, responded with a wildly unpopular $2.8 billion income and sales tax increase to balance the budget. Two years later, facing another budget shortfall, he turned to the state pension system for help. With almost unanimous support in the legislature, he pushed through the Pension Revaluation Act of 1992.

Payroll Deduction Contributions

With the Pension Protection Act of 2006 changing the record keeping requirements for charitable contributions, many taxpayers are wondering how to deduct contributions taken directly out of their paycheck without losing their tax credits. The Internal Revenue Service addressed this issue by announcing that "the taxpayer should retain a pay stub, Form W-2, or other document furnished by the employer that shows the total amount withheld for payment to charity, along with the pledge card that shows the name of the charity." For more details visit the article on their IRS’s website by clicking here.