Allworth Co-CEO Scott Hanson gives a quick breakdown of the most and least friendly states when it comes to taxes for retirees.
Have you ever thought about the advantages of moving to a low (or no) income tax state? (Especially if you are either retired or will be soon.)
You probably have.
There are loads of reasons retirees flock to, say, Florida. It has zero state income tax, over a thousand miles of coastline, and a desirable climate. (And, of course, manatees.)
And those tax savings? Depending on your income, they can indeed be substantial.
But (from purely a tax perspective), is Florida really the best state for retirees?
It’s close, but it’s not actually the best.
Depending on how you slice the numbers, the state that appears to offer retirees the most advantages is probably Wyoming.
Yes, Wyoming has open spaces, Yellowstone and Old Faithful; and because it’s the least populated state in the nation, there’s also rarely a line at the North Laramie Starbucks.
While Wyoming’s financial advantages begin with the fact that the Cowboy State has no state income tax, that’s just the start. It achieves its perch at the top of our list of financially friendly states because retirees also pay no state tax on:
Kiplinger magazine recently conducted a study in which it looked at the various tax obligations and ranked the best overall 10 states for a theoretical couple who would be receiving a monthly pension, Social Security, investment dividends, money from a retirement account, and capital gains. (This couple would also own a home valued at around $390,000, and they’d be in position to deduct about $10,000 a year in healthcare expenses.)
Top Ten States for Retirees in Terms of Lowest Overall Tax Burdens:
As lifespans and healthcare costs increase, it’s not surprising that more and more people I meet are considering moves to low tax states to make their money go further.
While there are certainly other considerations besides money (family, healthcare, home prices), just moving from a high-income tax state like California, say, over the border a few miles away to the Silver State, Nevada, or even across the country to the Sunshine State, could save a retiree more than 13% right off the top.
Interestingly, you may often see lists like these, and they just as often cite sales tax as a prominent reason to choose one state over another. But of all the prohibitive taxes that can drastically vary from state-to-state, for this study, sales tax had the least impact on the total tax responsibility of our hypothetical retirees.1
I was still mildly surprised to once again read that Warren Buffet’s home state (Nebraska) is the least-friendly state for retirees (in terms of taxes). That’s because The Cornhusker State has high property, Social Security and state income tax rates, and because it doesn’t offer any “golden parachute” exemptions for other kinds of retirement income.
According to Kiplinger’s research, tax-wise, the least accommodating states are:
While I wasn’t surprised to find states like New York, Connecticut and New Jersey on the list, I was a bit surprised that California didn’t make the top ten this year. But then, had the Kiplinger study used a different hypothetical couple, one with more net worth, that likely would have bumped California into the Top Ten.
Okay, it’s settled. Rather than a 100% relocation, you instead move half-time to a low-income tax state, and the rest you spend in the state where you have family, history, and deep social bonds.
Over the course of your retirement, you save tens of thousands of dollars.
(If only it were that simple?)
I hear a lot of people say they want to divide their time between, say, California and Nevada to save money.
While that sounds easy enough, you must do it carefully.
Because high-tax states are losing billions in revenue, local governments have gotten increasingly militant about determining exactly where everyone lives.
Especially good taxpayers.
And, frankly, state authorities who audit these matters generally don’t have a sense of humor.
Simply, when it comes to moving (or splitting time) to a low-tax state, do it right, and always do it legally.
First, the “typical” threshold for the minimum days per year you must spend in your “home” state is about 183. But auditors are not going to take your word for it. They might look at things like where you are registered to vote, where you have your vehicles registered, your driver’s license, bank accounts, and where you have certain types of mail and legal documents delivered.
California has even floated the idea of obligating taxpayers to the state for years after they leave, so, at the very least, I expect this vetting process to get a lot stickier going forward.
Other residence auditors will even go to the trouble of finding out things like where you go when you see your personal physician for a physical, and even where your pets spend their time.
More proof? According to a report I read, over the last few years, New York has taken to auditing virtually 100% of the high-tax payers who make the “move” to Florida.
In the end, moving to a low tax state is a huge decision that needs to make sense for all your goals, and not just your short or medium range financial ones.
Before you make any such decision, always speak with your advisor and your accountant to make sure it makes financial sense for you.
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1The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
2Scott Hanson (2011, 2012, 2013, 2014, 2015 & 2016) and Pat McClain (2012, 2013, 2014, 2015 & 2016). Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
3As of 12/20, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $10 billion in total assets under management and administration.
4Barron’s 2020 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
✢Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.