While state taxes may have less impact than federal taxes, they are still an important factor to consider in your financial plans, particularly for retirees.
In this Insight, we outline some important state-level tax considerations, explore non-tax related geographic preferences, and explain why an advisor can help find the right balance for your personal financial goals.
When planning for retirement, investment strategy and income distribution understandably receive the lion’s share of attention. But where you choose to live can also have a highly significant impact on your long-term financial picture, particularly when it comes to state and local taxes.
While state income taxes are often the most discussed, they represent only one part of a broader landscape. Property taxes, sales taxes, and the treatment of retirement income can all affect your day-to-day living expenses and your ability to preserve wealth over time.
In the sections below, we explore several key considerations to help evaluate how state-level tax differences may influence your optimal retirement strategy.
When comparing retirement destinations or planning for a potential move, it’s important to understand the different ways states apply taxes. The categories below can have a meaningful effect on your retirement income, expenses, and estate planning:
State income taxes can vary significantly and may play a meaningful role in retirement planning, particularly for those with substantial retirement income from pensions, Social Security, or distributions from tax-deferred accounts.
A number of states (such as Florida, Texas, and Nevada) do not impose any income tax, which can be attractive for retirees seeking to reduce their overall tax burden. Others, like Arizona, Indiana, and Pennsylvania, offer relatively low flat or modestly progressive income tax rates.
On the other end of the spectrum, high-income tax states such as California, New York, and Oregon apply graduated rates that can exceed 9%, which may substantially affect after-tax income in retirement.
It’s important to consider not just the headline rate, but also how each state treats different types of retirement income. The next sections explore these differences in more detail.
For many retirees, a primary residence represents both a major asset and an ongoing expense. Property taxes, which vary considerably by both state and locality, can influence not only your annual cost of living but also the long-term affordability of aging in place.
While lower-income tax states often attract attention, it’s equally important to assess how real estate taxes may impact your retirement budget, particularly if you plan to downsize, relocate, or tap home equity later in life. The map below provides a snapshot of effective property tax rates across the country.
For equity compensation taxed as capital gains, income is generally sourced to the state where you resided at the time of sale. For equity with ordinary income treatment (such as RSUs or options at vesting or exercise), states typically apply a pro-rata approach based on where the employee worked during the vesting period. We take a closer look at equity compensation planning in general here.
In addition to the federal estate tax, several states impose their own estate or inheritance taxes, which can meaningfully impact estate planning.
We take a deeper look at estate tax fundamentals in this Insight.
While qualified retirement accounts receive favorable tax treatment federally, state-level taxation varies widely.
Illinois, Iowa, Mississippi, and Pennsylvania do not tax pension or qualified account income. Other states offer partial exemptions. For example, New York exempts up to $20,000 per person, and Maryland exempts up to $39,500 for individuals over age 65 (from eligible employer plans, not IRAs).
Because the rules differ significantly by state and account type, this should be reviewed on a case-by-case basis with your advisor.
The state tax treatment of non-qualified deferred compensation depends on how the income is paid out. If payments are substantially equal and made over 10 years or more, they are typically taxed in the state where you reside at the time of distribution. However, lump sum payments or distributions made over fewer than 10 years are often taxed in the state where the income was earned, regardless of your current residency.
While Social Security benefits are federally taxable above certain income thresholds, most states do not tax them. A small number do, however, so it’s important to understand the specific rules in your state of residence.
The map below offers a helpful overview.
Tax considerations are an important part of retirement planning, but they are only one part of a much broader picture when it comes to achieving financial peace of mind. Choosing where to live in retirement should reflect a balance of financial prudence and personal priorities: what you value, how you want to spend your time, and the kind of life you envision for this next chapter.
Important non-tax considerations include:
State tax policy can have a meaningful impact on your retirement, but it shouldn’t be considered in isolation. A trusted advisor can help you evaluate the financial trade-offs of different locations, compare outcomes under various tax regimes, and project how each option aligns with your long-term goals.
With thoughtful planning, it’s possible to align both financial efficiency and the personal factors that matter most. Interested in a broader look at common retirement planning issues? Explore our guide to 5 Things Investors Transitioning to Retirement Cannot Afford to Overlook.
Looking for guidance on how state tax considerations may impact your retirement? Schedule a complimentary 30-minute consultation with one of our advisors today!