Which States Are Really Tax-Friendly?

August 30, 2013

One of the more interesting conversations I get to have with people who are close to retirement is about where they plan to live. Often, inertia (or a paid off mortgage) leads people to stay exactly where they are today. People are often attached to their homes and moving is rarely if ever a smooth and easy process. 

For those who are giving serious consideration to moving, or who have decided that they absolutely will move after retirement, there is a large segment of the population who want to remain in the same zip code (or close) but in a smaller place that requires far less upkeep and has a far lower property tax bill. And, there are people who are only in their current location because of work and they are ready to move to a different place altogether.  This group of people completely intrigues me.

The people who are fully comfortable with moving and who have made the decision always have a story to share. Hearing and telling stories is a big part of my life, so I enjoy learning about the moving parts in a person’s financial life.  The “movers” usually have a combination of 3 reasons for moving. 1 is family.  2 is climate and lifestyle.  3 is taxation.  The biggest part of this group stays in the US and there is a growing portion (still very small) who are considering living outside the US based purely on economic factors.  For today, I’ll stick with the stay-in-the-US folks.

This article from CNBC talks about the 10 most “tax friendly” states in the US for retirees. Surprisingly, a few of the states with no state income tax don’t make this list. Income taxes, though, aren’t the only way states raise revenue.

Anytime I hear that someone is moving to Florida or Texas because of the lack of a state income tax, my mind drifts off into this thought: “They have roads, bridges, schools, state legislatures, etc…so…how DO they fund state government?”  Property taxes, sales taxes, gasoline taxes, taxes on hotels and tourism, taxes on personal property, etc. are all parts of the tax puzzle.  The lure of “no state income tax” is great. But, if you are approaching retirement and thinking that you’d like to relocate you’re going to need to make a decision based on the whole picture, not just one piece.

Consider all taxes you would pay prior to making a major life commitment.  This state-by-state guide to taxation can help you see the whole picture. If you are considering a permanent relocation, take a look at your life.  How would your property taxes be impacted? How would your pensions, Social Security, part-time or full-time income, and investment earnings be taxed?  What about gas? Groceries? What may seem like a great deal from a tax standpoint initially may not seem like such a great deal after you do a “full life view” of taxation. Look before you leap!  (or hire a mover)