Working remotely during the pandemic pushed along the thought and feasibility for employees and self-employed persons to decide where to live. Many people took state income taxes into consideration when making the decision on where to relocate; which lead to waves of new residents flocking to states like Florida and Texas, whose combination of conservative governorship, job opportunity, warm weather and the absence of a state income tax made them a popular destination for workers and retirees both. As of 2021, there are nine states that do not have a state income tax on personal income.
Many may not realize that state governments use income tax revenue to fund road maintenance, state agencies directing education and Medicaid, general government, criminal services and more. The funding for those services has to come from some source whether it be: income tax, sales tax, business taxes, and/or property taxes. Residents living in states with no income taxes commonly face higher property tax rates to fund the services that would otherwise be paid for by collected income taxes. As an example, Florida ranks as the 24th (out of 50) most affordable combined state and average local sales tax rate in the nation, Tennessee being the highest. While Florida’s property tax rate rests above the national average, Texas falls in fourth position for states ranking highest in property taxes.
But a singular focus on state income tax rates could lead some people to overlook other considerations that could cause them to regret their decision. It would not be wise to assume that the absence of a state income tax meant that one’s total cost of living would drop to astonishing lower levels (barring a relocation away from California, Hawaii, NY or Washington).
In a twist, some states that do levy a state tax on income may offer pleasing tax relief on (all or with threshholds) security income, military or private pension income, IRA mandatory distributions for retirees, capital gains, rental income and more…..such as the state of Georgia. Georgia also offers an extra deduction for seniors age 65+. Georgia also has counties that allow taxpayers 62 and older to be exempt from paying school property tax which is a large contributor to property taxes. Considering these types of tax savings along with the many other attractive qualities about Georgia, this state has become a top contender for retirees to settle down in. to reiterate, while some states may indeed impose a heavy tax burden on high-income working-age individuals, those effects may be greatly reduced for retirees – such that, even in states considered ‘high-tax’ based solely on their top marginal tax rates, individuals might pay little or no tax on their income in retirement!
When considering a move, other types of costs should be considered like the cost of housing (rent or own) and homeowner’s insurance. It is not uncommon for states with high visitor traffic to levy higher sales tax on gas, groceries, clothes and more. Residents of Florida, which is a mecca for seniors, face much higher costs on over the counter drug store/pharma products, medical services and medical devices.
Ultimately, the decision of where to live is a personal one. State income tax may be part of the equation, but for a growing number of people, government policies, legalization of marijuana or abortion, weather, crime, proximity to family, lifestyle activities, and more prove to be a greater influence on the final decision. In sum, financial considerations like taxes may not (and perhaps should not) always be the deciding factor, but knowing that one’s retirement savings will be spent on more of what they want to spend it on (and not on taxes) can certainly play a part in where one chooses to live and play during their retirement years.
