Our school tax bill came in the mail the other day. It took my breath away. The school tax is the single largest bill my wife and I face all year, and now I see that it has increased by another 4 percent. If only our income was going up by 4 percent.
Coincidentally, my wife and I were at dinner over the weekend with two other couples. One of the couples had, until recently, been a neighbor of ours. They lived in a big house, in a development more upscale than ours, about two miles from us. But last year they sold their home and moved away, right after their youngest child graduated from high school and left for college.
The husband, in his early 60s, lost his job a few years ago. Now he's semi-retired, doing some consulting, making less money than he did before, although his wife still works full time for a nonprofit. They moved into a smaller house in a lake community, about 15 miles farther upstate. The wife told us they love living on their little lake. They go swimming and kayaking and love the view.
But a while later, over dessert and coffee, the husband offered the real reason why they had moved: Taxes. The real estate taxes on their new house, in a modest community with a not-as-well-regarded school system, are less than half of what they are at their old place. Who needs to pay those high school taxes, he ventured, when your kids are grown up and gone away? Left unsaid was the other question: Who can afford those school taxes when you're no longer pulling in a paycheck, and instead living on a fixed income?
It made me wonder: Do taxes really make that much of a difference?
On the one hand, it does seem like a waste of money to pay thousands of dollars a year in property taxes – the majority of which go to the school system – when your kids no longer attend the schools. But, do we not have an obligation to contribute to our community and help pay to educate the next cohort of children growing up in our neighborhood? And even as seniors, we arguably benefit from a better educated, more sophisticated group of young people living in our midst. More education means less crime, less drugs and fewer problems in general.
Yet many experts cite high property taxes as the single most important reason why retirees living on a fixed income decide to move elsewhere. "The most significant tax threat to most retirees is the property tax, because it is based on the value of your home and bears no direct relation to your income," says John Brady, founder of TopRetirements.com.
Yet for retirees, there are plenty more taxes to consider besides the real estate tax. Some states levy an income tax on Social Security, pensions or IRA withdrawals, while others do not. And both states and localities can get creative when it comes to raising money, including excise taxes, sales taxes, gas taxes, estate and inheritance taxes.
As an example, Pennsylvania has relatively high real estate taxes, but the state offers other incentives to help keep its retirees solvent. According to the Kiplinger state-by-state tax guide, Pennsylvania is one of only two states (Mississippi is the other) that exempts all retirement income – including public and private pensions and IRA and 401(k) distributions – from its state income tax.
I'm not necessarily advising retirees to move away from their high-tax town, or their high-tax state, if that's where they want to live. After all, I myself live in New York State, which by all measures ranks as a high-tax area. And, I'd argue at least theoretically, you receive benefits and services for the high taxes you pay, including better streets, parks, museums, schools, libraries and more services for senior citizens.
Taxes are just one factor in what makes a town, or state, attractive for retirees. There are plenty of other reasons to live where you live, such as family, friends, climate and a host of other factors.
But then I see that school tax bill sitting over there on the corner of my desk. It's due by the end of September. And our youngest child graduated from the local school system four years ago. Maybe it's time to start looking for our place in the sun, after all.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.