Daily Gains Letter

Two of the Best Tax-Friendly States for Retirees

By for Daily Gains Letter |

200403644-001Retiring doesn’t mean just leaving your job behind. For some retirees, it also involves packing up the house and moving to another state. Not so they can be closer to their grandchildren, warmer climes, or better golf courses; but because they want to pay fewer taxes and stretch their investment dollar.

Retiring to another state is about finding a good quality of life at a reasonable price. Why live frugally if you don’t have to?

Alaska

The largest state in the nation is also the most tax friendly. In addition to having no income tax and state tax, Alaska pays out an annual dividend from its Permanent Fund. The oil wealth savings account administered by the state is paid out annually to everyone who has lived there for at least one year.

In 2012, residents were paid $878.00, less than 2011’s payout of $1,174. The payout was less as stock market losses began to be averaged into the five-year dividend calculation formula. Over the years, the amount of the Permanent Fund check has ranged from a low of $331.29 in 1984 to a high of $2,069 in 2008. (Source: “2012 Alaska Permanent Fund dividend payout: $878,” Alaska Dispatch September 18, 2012, last accessed March 18, 2013.)

Furthermore, only 25 municipalities even levy a property tax. Of the state’s 162 municipalities, 62 impose local sales taxes of up to seven percent. There are other types of local taxes, including: hotel/motel “bed” taxes, severance taxes, liquor and tobacco taxes, gaming (pull tabs) taxes, and fuel transfer taxes. (Source: “Alaska Tax Facts,” Office of the State Assessor, Alaska web site, last accessed March 18, 2013.)

Juneau and Anchorage have Alaska’s most expensive average home price at $241,000. However, homeowners who are 65 years old or older are exempt from municipal taxes on the first $150,000 of the assessed value of their home.

“Tax Freedom Day” in Alaska arrived on April 6, 2012. Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2012, Alaska taxpayers worked until April 6 (the sixth earliest date, nationally) to pay their total tax bill. (Source: “The facts on Alaska’s tax climate,” Tax Foundation web site, last accessed March 18, 2013.)

Nevada

If you prefer warmer weather to the wild wilderness of Alaska, you might want to consider Nevada. Thanks to tourists and gambling, Nevada is the second best tax-friendly state for retirees. Because Nevada does not collect income tax, retirees’ Social Security benefits, pensions, or individual retirement account (IRA) distributions are tax exempt. There is no inheritance tax, and even income from a part-time job won’t be taxed.

Both real estate and personal property are subject to state and local taxes, based on 35% of the assessed fair market value (and revalued every year). However, homeowners who are aged 62 or older may be eligible for a refund of up to 90% of these taxes if they make less than $28,677 each year.

Sales taxes, which can top eight percent in some areas, are among the highest in the country. Some states levy sales taxes on food and prescription drugs—Nevada doesn’t. On the other hand, some states do not charge taxes on clothing—Nevada does. Overall, Nevada has the second-lowest combined state and local tax burden.

In 2012, Tax Freedom Day in Nevada arrived on April 19. In 2012, Nevada taxpayers worked until April 19 (the 14th latest date, nationally) to pay off their total tax bill.

With all of its tax benefits, it’s not a surprise to discover that Nevada could become the number one retirement destination in the U.S by the end of the decade.

Moving to another state after retiring is not going to appeal to everyone. But those who are considering a move can find states with favorable state and local taxes—conditions that can increase income and quality of life.

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