Florida, where we’ve lived for 35 years of marriage, has long been viewed as a retirement mecca, both for its warm weather and the absence of state income tax. The state legislature even got rid of the “intangibles tax,” a small but pesky levy on the value of securities held by Florida residents in non-retirement accounts.
But Florida is far from a tax haven, as we will show you. Those looking to retire in this state, or any other, need to consider the tax consequences.
“It may be enough to make some individuals consider moving and others to realize that their best option may be to stay put,” said John Logan, state tax analyst for CCH, a Wolters Kluwer business and leading provider of tax law information.
More than we realized, taxes are a factor in determining where people choose to live in retirement. An AARP study published last fall found that areas that attract retirees tend to have lower property and state income taxes, a factor ranked higher than recreation and entertainment facilities.
In addition, when asked what the priorities of government should be in the next five years, the most common response from people 60 and over in areas that attract retirees was “low local taxes,” ahead of less traffic congestion and better transportation.
Problem is, “understanding the intricacies of state tax law isn’t easy,” as Logan said.
In Florida, for example, to compensate for the lack of a state income tax, homeowners are assessed an annual property tax bill that often approaches 2 percent of the home’s assessed value. Because of a quirk in the law, retirees who trade down to a smaller home in Florida may end up paying a bigger property tax.
That’s because, as long as you stay in your house, its assessed value for tax purposes can go up no more than 3 percent a year, even if its market or resale value has gone through the roof.
But if you sell the house and buy another, your property taxes on the new house will be based on its most current market value, which after years of appreciation can be substantially higher than the assessed value on your old home. As a result, newspapers in Florida have been full of stories of retirees who realized too late that, because of the property taxes, they couldn’t really afford the house they bought.
The only solution to this tax issue is to thoroughly investigate the laws of any state you are thinking of moving to. You cannot rely on generalizations because, as research by CCH found, the tax treatment of income - particularly retirement income - is almost unique in every state, and there are also widespread differences in property and sales taxes.
Seven states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming - do not levy any form of state income tax. Some states such as Pennsylvania do have state income taxes but exempt pension income entirely, while others such as Arkansas exempt a portion up to a certain level.
Still others add an age restriction. For example, in Georgia you must be 62 or older to exclude a portion of your pension income from state tax. Some states also provide special tax breaks for other types of retirement income. For example, Illinois allows not just income from federally qualified plans to be excluded, but also certain IRA distributions and retirement payments to a retired partner.
But other states such as California do not allow any exemptions for pension or other retirement income that’s included in an individual federal adjusted gross income, while others exempt only government or military pensions but not private pensions. Also, 26 states that do have an income tax do not tax Social Security income.
Conclusion? “It’s wise to speak to your tax adviser if you are considering relocation to another area,” Logan advised.
Humberto and Georgina Cruz are a husband-and-wife writing team who work together in this column. Send questions and comments to AskHumberto@aol.com, GVCruz@aol.com.