Some states are more tax-friendly for retirees than others, especially when it comes to property and Social Security benefits.
• Property taxes. Tax rates vary significantly from state to state and municipality to municipality. Don't look only at existing property-tax rates, says Kathleen Thies, state-tax analyst for CCH, a major provider of tax information. Ask how property taxes have changed over the years. "If you're moving into an up-and-coming area versus one that is more mature, or if you are moving into an area that is gentrifying, you may find your property taxes increasing at a higher-than-anticipated rate."
It's particularly difficult to compare real-estate taxes, because local jurisdictions follow different assessment and reporting procedures. For example, real-estate taxes in Florida are based on 100 percent of market value, while homes in South Carolina are assessed at 4 percent of market value. And some jurisdictions with relatively low real-estate taxes are located in areas that have above-average real-estate values.
Based on data from a 2006 Census Bureau survey and Tax Foundation calculations, the five states with the lowest median real-estate taxes (from lowest to highest) are Louisiana, Alabama, West Virginia, Mississippi and Arkansas. The states with the highest median real-estate taxes (from highest to lowest) are New Jersey, New Hampshire, Connecticut, New York and Massachusetts.
• Social Security benefits. Most states are moving away from taxing Social Security benefits. In addition to the nine states that do not have a broad-based individual income tax, 27 states and the District of Columbia don't tax Social Security. Wisconsin was the latest to join those ranks in 2008.
The remaining 14 states Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia tax Social Security benefits to some extent.
Iowa will gradually phase out its Social Security tax by 2014, starting in 2008. Missouri will increase the amount of Social Security benefits that may be deducted from taxable state income, rising from 35 percent in 2008 to 100 percent in 2012 and beyond. Kansas residents can now exclude Social Security income from their taxes if their adjusted gross income is less than $75,000, up from $50,000 in 2007.There's no guarantee that this trend of exempting Social Security benefits from taxes will continue, says Thies. "But many states seem to be heading in that direction as their populations age and tax treatment of Social Security income becomes a bigger priority for voters."
Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected].