Retirees Who Move to Lower-Tax States May Not Save as Much as They Think - WSJ
Retirees move to new states for all sorts of reasons. For some it’s the weather, or to be near family, or to be closer to medical care. But for those moving in search of lower income taxes—and that’s a lot of people—it might pay to get out the calculator.
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The impact of state income taxes depends in part on the tax bracket. For instance, the state income tax may be a significant factor for wealthier retirees relying on investment returns, but for many middle-income retirees, income taxes become less important since they are typically drawing down and not earning so much, says Jared Walczak, vice president of state projects at the Tax Foundation in Washington, D.C., a tax-policy research organization.
For middle-income retirees, sales taxes and property taxes often take precedent, Walczak says, since states with little to no income taxes often rely on these two categories. For example, Tennessee has no income tax, but its combined state and average local sales-tax rate of 9.56% is the second-highest nationally, according to the Tax Foundation.
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She says many states have homestead exemptions, which limit annual rises in property-tax assessed value—until a property is sold. As such, estimated property-tax figures for homes listed on online real-estate websites might not reflect increases that often result from a new purchase. Frederick says that real-estate agents can estimate a potential property tax increase, but the updated assessed value often isn’t reflected until the second year’s tax bill, coming as an unwelcome surprise.
Andrew Connors, managing director at Fairport Wealth in Cleveland, says he recently met with clients who moved to Sarasota, Fla., from Michigan and are rethinking their retirement in Florida as they’re paying $35,000 annually in homeowners insurance, property taxes and homeowners-association fees on their condo. Bankrate estimates that average cost of home insurance is $2,242 annually for a policy with a $300,000 maximum insurance payout, with Florida the second-highest at $5,340, after Nebraska’s $5,640.
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Financial advisers encourage retirees to not limit their thinking to what the tax burden might be in a new location but also to think about how far their dollars will go in general terms. Both Bankrate and the Tax Foundation offer calculators that allow one to compare cost of living and purchasing power in different metropolitan areas.
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