Moving to a State with Low (or no!) Income Taxes - Episode 46
Considering that my firm focuses on retirees and pre-retirees, it is probably no surprise that many of them have at least thought about what it might be like to move to a state that has no income tax.
While the state you are considering moving to may have lower income tax rates, they may also have higher property taxes, sales taxes, insurance rates, or other cost-of-living expenses that would reduce the financial benefit.
Afterall, these states with low or no income tax have to be funded somehow.
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Things to Consider Besides Income Taxes
For those of you that are annoyed with high income taxes in your home state, I would recommend taking an in-depth look at the potential financial and lifestyle implications before considering a move.
To thoroughly review your overall tax picture, you would need to consider property taxes, sales taxes, and estate taxes, in addition to the income taxes of a state where you are considering moving.
It’s possible the area with the lowest property taxes could be the best financial move. But that will depend on an analysis of your personal situation.
You may also need to pay attention to the residency requirements of the new state to make sure you are eligible for the financial benefits you are seeking.
There are often additional factors to consider if you are working in one state and living in another state.
Beyond the financial aspects, there are also lifestyle activities, such as golf, skiing, boating, and traveling to see family, to consider in your decision. Big decisions are often financial, but also emotional.
How to Compare Locations
It’s hard to make an apples-to-apples comparison of two locations when there are so many factors involved.
Those of us in Illinois pay a flat 4.95% in state income tax, while states like Florida, Tennessee, and Texas don’t have a state income tax at all.
It is also important to note that while most income in Illinois is taxed at 4.95%, Illinois does NOT currently tax retirement income, which includes Social Security and IRA distributions. This is a huge benefit for retirees here in Illinois.
If you were considering moving to Florida, you would have 0% income tax, but your car insurance or property taxes might be higher. (Maybe not relative to Illinois, but everywhere in general.
There are 7 states that don’t currently charge an income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Other states only tax certain types of income.
While Tennessee doesn’t charge an income tax, the state has the 2nd highest sales tax rate in the country when looking at combined state and local sales tax rates.
Other financial things to consider with an out-of-state move would include medical expenses, car insurance, homeowner’s insurance, or new disaster-related coverage, such as flooding.
Instead of making a decision based solely on finances, a better option might be to consider this: Would the experience of your retirement improve by moving to another state.
Is your new location going to have the things you desire from your retirement? This could include opportunities for an active lifestyle, social opportunities, proximity to family, better weather or changes in season, or whatever is important to you.
If you move for any of those lifestyle reasons and you happen to also save on income taxes, that’s even better!
You want to take a look at everything in your life, not just financial but other considerations as well. Try to combine all aspects to make the best decision you can for yourself.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your retirement situation.