Emily Brandon

Retirement should be less taxing than working. And it can be, if you seek out a state with lower taxes than the place you live now. State and local taxes vary considerably by location. Here are the major taxes and tax breaks you should take into account when deciding where to retire:

Social Security.

Most states no longer tax Social Security benefits. Some 35 states don't require residents to pay tax on Social Security income, according to an analysis by tax publisher CCH. Missouri and Iowa are in the process of phasing out their Social Security taxes. And Kansas residents with adjusted gross incomes of $75,000 or less are exempt from paying taxes on their Social Security checks.

Pensions.

The tax treatment of pension income varies considerably from state to state. Some states, such as Pennsylvania and Mississippi, exempt all pension income from taxes. Other states exempt a portion of specific types of pension income. In Michigan, for example, all federal pensions and public pensions from specific states are totally exempt from tax. Private pensions were tax-exempt up to $45,120 for individuals and $90,240 for couples in tax year 2009. "When the economy was doing well, pension tax thresholds were moving out further and further, but now we're seeing a freeze on these threshold amounts," says Kathleen Thies, a CCH state tax analyst.

Income tax.

Retirees who haven't saved enough to finance their desired lifestyle may need to work during their golden years. If your retirement plans include a part-time job, take a look at state income taxes. Seven states have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. And two states, New Hampshire and Tennessee, tax dividend and interest income only.

While states without an income tax can seem like an obvious choice for retirees, it's also important to look at property and sales taxes, which tend to be higher in income tax-free states. "If you're thinking of retiring in four different places, figure out the total tax cost in all the places and then you can make an effective comparison," advises Paul Erickson, a professor of accounting at Baylor University. "The property tax and sales tax could be higher than what you paid on income tax."

Property tax.

The median property tax paid in the United States in 2008 was $1,897, according to a Tax Foundation analysis of Census Bureau data. But taxes paid ranged from a median of just $188 in Louisiana to $6,320 in New Jersey. "Most states give residents over a certain age some type of a break on their property taxes," says Rob Shrum, state affairs manager for the Tax Foundation. Some counties in Florida, for example, allow permanent residents age 65 and older within certain income limits a tax exemption of up to $50,000 of the value of their primary residence. Widows and widowers also get an extra $500 property tax exemption in Florida. Contact a state's department of revenue to inquire about property tax breaks for seniors.

Sales tax.

Many cash-strapped states have been increasing their sales tax to raise needed funds. Seven states increased their sales tax rate in 2009, according to Vertex Inc. research. The average sales tax rate in the United States now stands at 5.5 percent. It may also be worth looking at the types of items and services that sales and excise taxes apply to. "Typically elderly people will be purchasing less cars or furniture or big-ticket items than someone with a growing family, but they still need to purchase food and clothing," says John Minassian, vice president of content development for Vertex Inc.

There are five states that levy no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. States with low taxes tax r ates for shoppers include Colorado (2.9 percent) and Georgia, Hawaii, Louisiana, New York, and Wyoming (all 4 percent). California has the highest sales tax in the country at 8.25 percent in 2010.

 

Personal Finance - How to Find a Low-Tax Place to Retire