Every client's goals are different when it comes to choosing where to retire, but from a tax perspective, there are some clear winners that can allow a client to maximize the value of accumulated retirement savings.
While the client's lifestyle choices — a desire for an expensive home vs. spending on consumer products, for example — greatly impact the tax system that will provide the most substantial benefits, below is a list of ten of the top states for retirees, from a tax perspective.
A note on residency: For clients seeking to take advantage of some of the property tax exemptions permitted in these states, it's important to note that they must generally establish residency in the new state in order to be eligible. Establishing residency can be accomplished in a variety of ways, including by providing proof of the date out-of-state residency ended and in-state residency began (for example, by showing an in-state drivers' license, utility bills, vehicle and voter registration, and addresses on bank statements and IRS returns).
Alaska
While Alaska might not be the most obvious state that clients look to for retirement, when it comes to taxes, the advantages are undeniable. Alaska has no state income tax, no estate or inheritance taxes and no sales taxes.
As a bonus, Alaska state residents receive an annual dividend check derived from the state's oil wealth. According to Tax Foundation research, Alaska also imposes one of the two lowest median property tax rates in the country — and homeowners aged 65 or older (and surviving spouses aged 60 or older) are exempt from municipal taxes on the first $150,000 of their home value.
Though retirees aren't likely to find many of the outdoor leisure activities that some of the more obvious retirement states offer, from a pure tax perspective, retiring in Alaska is a winner.
Wyoming
The wide-open spaces of Wyoming may not have made your client's list of ideal retirement settings, but with no state income, estate or inheritance taxes, the tax advantages are clear.
Property taxes in Wyoming are established based on a fractional assessment system, which results in most property being assessed on only 9.5 percent of its market value. Further, state sales taxes are lower than the national average, at 4 percent, with exemptions for prescription drugs and food.
South Dakota
South Dakota's property taxes are a bit higher than Alaska and Wyoming, but resident seniors aged 65 and older qualify for an assessment tax freeze or a municipal tax reduction if their income falls below certain threshold values and the value of their home is less than approximately $182,000.
Property tax refunds are also available for low-income senior citizen residents (generally, income must be as low as $10,250 for single taxpayers and $13,250 for couples). South Dakota income, estate and inheritance taxes are favorably set at zero percent, and, like Wyoming, the sales tax is a relatively low 4 percent.
Georgia
Georgia is creeping up in the rankings when it comes to the best retirement states — not only is its weather relatively mild compared to other tax-friendly jurisdictions, but it has plans to phase out its property tax system by 2016.
Currently, Georgia residents aged 65 and older are exempt from all state property taxes on their homes, as well as up to ten acres of land. The state income tax ranges from 1 to 6 percent, but Social Security income is exempt. Residents aged 62-64 can also exempt up to $35,000 per year in other retirement income, rising to $65,000 for those aged 65 and older (which can exempt up to $130,000 per couple).
Georgia does not impose a state estate or inheritance tax, and sales taxes are relatively low at 4 percent (with exemptions for food and drugs), though local taxes may add to the state sales tax burden.
Louisiana
Louisiana does impose a state income tax of between 2 and 6 percent, but offers attractive exemptions for retired residents. Social Security benefits are exempt from Louisiana's income tax, as are government pension funds (including military and civil service pension funds).
Residents 65 and older can also exclude up to $6,000 of annual income from private pensions, annuities and IRAs. Louisiana does not impose an estate or inheritance tax, and the sales tax is low at 4 percent with exemptions for food and prescription drugs.
Further, Tax Foundation research suggests that Louisiana state property taxes are one of the lowest in the U.S., with the added bonus that retired residents age 65 or older with income below approximately $70,000 are eligible for an assessment freeze on their home value for as long as they live in the home.
