Retiree Taxes: A Closer Look

Kiplinger recently released a new tool on their website, "State-by-State Guide to Taxes on Retirees," which allows readers to compare state taxes on retirement income.

Tax-Friendly And Unfriendly States

According to their data, the top ten most tax-friendly states include:

Alaska
Arizona
Delaware
Florida
Georgia
Louisiana
Mississippi
Nevada
South Dakota
Wyoming

And, the bottom ten – or least tax-friendly states are:

California
Connecticut
Minnesota
Montana
Nebraska
New Jersey
New York
Oregon
Rhode Island
Vermont

When looking into what factors were considered to make the list, Kiplinger compared income tax rates, state sales taxes, Social Security taxes, and estate/inheritance taxes.

While these tax considerations are definitely key indicators of states' "tax-friendliness," there are additional tax-related issues that the handy tool overlooks.

Benzinga spoke with Boston-area law firm Brown & Knight partner Michael S. Knight for additional insight.

Pension Income Taxation

Benzinga: When pre-retirees consider relocating for retirement or after retirement, are there other tax considerations to be made beyond the basics outlined by Kiplinger's tool?Michael Knight:

Before 1996, some states maintained statutes allowing them to tax an individual on pension income even after the person relocated to another state. So, for instance, if a person spent his or her working years residing in one state and earning a pension there, that state would tax the pension even if that person permanently retired to a different state.

BZ: What happened in 1996? MK: In early 1996, Congress enacted the Pension Source Tax Act of 1996 (P.L. 104-94) stipulating: "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State."
As such, in many cases, this enactment allows an individual to escape state tax on pension income altogether by relocating to one of the 10 states that doesn't tax it.
BZ: What are those 10 states? MK: Alaska, Florida, Mississippi, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. BZ: Thank you for taking the time to enlighten us on just one more area of retirement moves that deserve further consideration.

Based upon the information provided by Mr. Knight and the plethora of resources available to the average pre-retiree, it becomes clear how necessary research and communication is when planning for your future and the future of your loved ones.

Take the time to rationally discuss and plan for the years to come. Be prudent regarding major life changes, regardless of age and financial stability. Major life disruptions, such as a change of income or move, can and will have effects on other aspects of life. Tax implications are just one area. Talk to your financial planner or lawyer for further guidance.

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