Retiring in a town with low taxes can help retirees stretch their fixed income. But states with low income taxes often have higher sales or property taxes, and vice versa. U.S. News recently asked former auditor Eve Evans, currently a vice president of Vacation Publications and coauthor of America's Best Low-Tax Retirement Towns, how to weigh the different types of taxes and find a haven for retirement. Excerpts:
What's the best way to find a town with a more favorable tax rate than where you live now?
Taxes should play a big part in the research and decision-making process of deciding where to live in retirement, because they can vary so widely across the country from state to state and often from city to city within the same state. I recommend searching for retirement destinations based on all of the important criteria and then narrowing that search to those places with the lowest tax burdens. To measure a destination against your current residence, you must compare all taxes and fees, including property tax, personal property tax, auto fees, sales tax, local income tax, and state income tax.
How much can tax rates generally vary?
Tax rates can vary greatly from city to city. In our book, we compare total tax burdens in 203 cities in all 50 states, using 2006 tax rates. For example, a couple with gross income of $30,000 from all sources and a home valued at $175,000 would have a total state and local tax burden of $172 in Wilmington, Del., compared with $7,758 in East Stroudsburg, Pa., a substantial difference of $7,586 for the year. The average total tax for our cities in this category was $3,396. Another example: A couple with gross income of $60,000 from all sources and a home valued at $225,000 in Charleston, S.C., would have a total state and local tax burden of $3,097, compared with $9,482 if they lived in Hartford, Conn. The average total tax for our cities in this category was $5,382.
What types of tax breaks can seniors get?
Tax exemptions, deductions, and credits are widespread and significant for seniors. The most common tax breaks are age related. In some states, residents are exempt from state income tax for all or part of federal, state, or private pension income. For example, Mississippi exempts all pensions, and Colorado offers a generous exemption on pension income. On the other hand, some states, such as California, don't exclude any pension income from taxation. Many cities and states, such as South Carolina, offer age-related property tax exemptions or deductions. In some cities, there are sales tax exemptions for items important to many seniors, such as prescription medications, medical services, and medical supplies.
How should one go about finding out about local tax breaks for seniors?
Information is often available by searching state, county, and city websites. You should also contact state departments of revenue and local taxing authorities.
What tax mistakes do a lot of seniors make?
The key consideration is not a particular type of tax but to consider the total of all types of taxes in effect for a location. For example, many retirees use the presence or absence of a state income tax as a litmus test for a retirement destination. This is a serious miscalculation, as higher sales and property taxes can offset the lack of a state income tax, particularly for retirees with little or no earned income. The lack of a state income tax doesn't necessarily ensure a low total tax burden.
Where do you live? Did you move there for lower taxes?
I moved to Houston 25 years ago, when tax burdens for retirees was the furthest thing from my mind. I am now of an age where these things do matter to me, and our research revealed that Houston is about average for seniors in terms of taxation—not a tax heaven, but also not a tax hell.