Before moving, study whole financial picture

Published: Sunday, July 13 2008 12:08 a.m. MDT

If you're thinking about relocating permanently or buying a second home to live in for part of the year — and where you may be taxed on part of your income — don't make a move until you've scrutinized the whole financial picture in your potential new home.

No matter where you live, your federal taxes will be the same. But you may be surprised at how much your state and local tax burden can vary from one location to another.

Don't assume, for example, that a state with no income tax qualifies as a tax haven. High sales and property taxes can more than offset the absence of an income tax, says Mary Lu Abbott, editor of Where to Retire magazine. Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — have no state income tax. New Hampshire and Tennessee tax only dividend and interest income that exceeds certain limits.

In addition, your tax bite may vary greatly within a single state. For example, a retired couple with an annual income of $90,000 and a home worth $525,000 would pay about $13,000 in total state taxes if they lived in Fort Lauderdale, Fla. — but only $9,000 if they lived across the state in Siesta Key.

The contrast is due mainly to differences in property taxes, says Abbott. By comparison, if the same couple lived on Hilton Head Island, they would pay less than $6,600 in total taxes because although South Carolina has an income tax, it has relatively low property taxes.

Abbott drew her examples from her company's sister publication, "America's Best Low-Tax Retirement Towns" (Vacation Publications, $18.95). The book rates the total tax burden for more than 200 cities, broken down by different income levels and home values — a good starting point if you're trying to determine the financial implications of moving or staying put.

But there's no substitute for calculating the taxes you would actually pay in a potential new home, says Paul Erickson, a professor of taxation at Baylor University, in Waco, Texas. "There are too many differences in tax rates, brackets, exclusions and deductions," says Erickson.

"Obviously, a decision should not be based on taxes alone," Erickson adds. "But if other factors are relatively equal, a substantial difference in tax burden may dictate the best retirement location."

You can download state income-tax forms from Taxsites.com or prepare a sample state-tax form with software such as TurboTax.


Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.

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