Retirees, in particular, often consider moving, and warm weather isn't the only reason Florida is a popular choice. In addition to its lack of state income tax, the state does not tax Social Security income or pension income, either. According to Thies, retirees are paying special attention to how tax rates differ by state now, in the wake of the recession, when so many people's savings have been battered. Where they choose to live in retirement, she says, plays a major role in the lifestyle they can afford, partly because of how much tax rates differ.
According to Thies's analysis, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming are the seven states that do not impose state income taxes on retirement income in addition to not charging state income tax. New Hampshire and Tennessee, meanwhile, charge income taxes only on dividends and interest (5 percent and 6 percent, respectively.) Maine, on the other hand, charges a relatively steep rate of 8.5 percent on income over $19,950 ($39,900 for joint filers). Federal law gives states wide latitude in how they decide to tax Social Security and pension income, which is why rates vary so widely.
The good news for big earners is that many of the recent tax hikes apply for a limited time only. In Oregon, for example, the recent hikes will be reversed in 2012, and Thies says she expects other states to reverse their tax rate increases as well, especially as the economy, and state budgets, slowly improve.
But when many states are raising their rates at the same time, as they're doing now, it can be harder to dodge the tax man. Unless, of course, you're considering a move to Alaska.