finance.yahoo.com/retirement/article/103293/Tax-Free-in-the-Rust-Belt
When John Jazdcyk retired in 2004 from his management job at a Green Bay, Wis. Procter & Gamble plant, he and his wife, Susan, debated whether to move full-time to their vacation home on Lake Mullet in Cheboygan, Mich. Then they learned that Michigan exempts $81,840 a year in private retirement income per couple, in addition to Social Security, from its 39% state income tax. Wisconsin, by contrast, taxes private retirement payments, as it does salary and other income, at 56%. "Whenever taxes can be avoided, I feel better," says new Michigan resident Jazdcyk, 59. Accepted wisdom: Tax-averse retirees should move to Florida or Nevada, which have no state income or estate taxes. But what if you don't worship the sun or relish a long-distance move? In recent years other states, too, have been lavishing tax goodies on retirees, including affluent ones. With a little research you might discover your own retirement tax haven is close to home.
In Pictures: 10 Hidden Taxes You're Probably Paying Most states don't tax Social Security benefits. Three states with broad income taxes (Illinois, Mississippi and Pennsylvania) exempt all private and public pension payouts, including withdrawals from individual retirement accounts, from their taxes. More than a dozen other states exempt some annual dollar amount of seniors' income--from private pensions, IRAs and sometimes other nonwage sources (see table).
In addition to Florida and Nevada, seven states--Alaska, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming--have no broad income tax. New Hampshire has no sales tax either, which would seem to make it an ideal New England retirement retreat. Except New Hampshire taxes investment income, as does Tennessee, which can be significant if your financial assets are mostly in nonretirement accounts. Worse, according to a recent National Association of Home Builders study, New Hampshire's real estate taxes are among the highest in the nation, at a median 16% of home value, double Massachusetts' median rate. Even if you are years away from hanging it up, it makes sense to consider taxes in your retirement planning now. "If your taxes are a lot lower, your retirement funds are going to go further," reasons Don R Weigandt, 60, a managing director at JPMorgan Private Bank in Los Angeles, who is considering following the well-worn trail to Nevada himself when he retires. Your tax outlook could affect not just how much you save, but how. Example: A growing number of workers have a choice between contributing pretax dollars to a traditional 401 or funding a newfangled Roth 401. You put aftertax dollars in the Roth, meaning you get no deduction now. But when you retire, withdrawals don't count as taxable income. A Roth is a good deal for young workers whose tax rates are likely to rise. In that case grabbing the deduction now, when your combined federal-state tax rate is higher, probably makes more sense than forgoing a current deduction to open a Roth. There are other reasons that tax planning should start well before you collect your gold watch. Stock options and deferred compensation require special handling since, if you move, your old state might pursue you for taxes on these--particularly if that old state is New York or California. Do you hold your employer's stock in a workplace retirement account? It may be better to cash out the stock portion than to roll it into an IRA, since gains in employer stock are taxed at the lower federal capital gains rate, which now tops out at 15%. By contrast, withdrawals from a regular IRA are taxed as ordinary income, at a federal rate as high as 35%. The Jazdcyks sold big blocks of P&G stock to take advantage of this provision and made sure to do so before leaving Green Bay. Wisconsin exempts 60% of capital gains from tax, reducing the effective Wisconsin tax on gains to 26%, versus the 39% they now pay on long-term gains in Michigan, explains the couple's CPA, Stephen Bigge of Virchow Krause & Co. Here are some tax issues to consider: Social Security Better-off seniors generally pay federal taxes on 85% of their Social Security benefits. But only 15 states still tax any of these benefits, and some of those are dropping or cutting their taxes. Missouri is phasing out its tax by 2012 and Iowa by 2014. Seven that follow the feds in taxing up to 85% of Social Security benefits. Among the offenders are Minnesota, with a top state rate of 785%, and Rhode Island, at 99%. Private pensions and IRAs Good news: You can now accumulate large amounts in a pretax retirement account while working in a high-tax state and then move to a state that doesn't tax pension withdrawals without worrying about tax collectors from your old state coming after you. In 1996 Congress ordered states to stop pursuing most former residents for taxes on pensions. This stops California from going after a former resident who is living in Reno, Nev. when he taps an IRA or draws a pension from Procter & Gamble. last year Congress extended it to cover former partners (eg, lawyers and accountants), too. Warning: This still doesn't keep your old state from taxing deferred compensation paid out to you in a lump sum. It does, however, protect deferred compensation received in equal installments over ten years or more. If you retire to a state that provides a limited annual exemption for private pensions, try smoothing out your income to take maximum advantage of it. New York exempts $20,000 a year in pension income per person, beginning when a resident turns 59 1/ 2. An older New Yorker who isn't receiving any other pension should consider taking out $20,000 a year from his pretax IRA and rolling the money into a Roth IRA, suggests New York estate lawyer Bruce Steiner. Public pensions Retired government employees get even better state tax treatment than private pensioners. In addition to the nine states without income taxes and three that don't tax any pension income, another seven (Alabama, Hawaii, Kansas, Louisiana, Massachusetts, Michigan and New York) exempt all federal, state and local pensions from tax. In fact, only five states (California, Indiana, Nebraska, Rhode Island and Vermont) don't provide public pensioners with any special breaks. This favored tax status dates back to a time when (unlike today) state and local workers weren't well paid and received relatively small pensions. Rather than cut their own retirees bigger checks, the states gave them tax breaks. But in 1989 the US Supreme Court ruled a state couldn't exempt its own pensions and not federal government ones. It's still legal for states to favor their own retirees over those who worked for other states, and a handful do. Kansas, for example, gives a full exclusion for Kansas pensions but none for pensions earned working for other states. Other income breaks Many states give old folks higher standard deductions or personal exemptions--for example, an extra $4,200 per couple exemption in Arizona and Michigan. Plus, a handful give seniors large breaks for income from virtually any investment. A two-year-old break allows Georgians 62 and older to exclude from taxable income $60,000 per couple (rising to $70,000 per couple in 2008) of interest, dividends, capital gains, rents, pensions and annuities. Substantial deductions are also available to folks who contribute to 529 college savings plans, as many grandparents do. Deposits in these plans aren't deductible on federal returns. But South Carolina, West Virginia, New Mexico and Colorado allow an unlimited deduction--up to total taxable income--for contributions to the 529s they sponsor. Pennsylvania allows each individual taxpayer to deduct $12,000 per child a year in contributions to any state's 529.
Real estate taxes Forty states exempt a certain amount of the value of a resident's primary home from real estate tax, and many of them provide an even larger exemption to old folks. Florida is the current center of retiree real estate tax angst. A law in place since 1995 keeps the assessment on a primary residence (not a vacation home) from rising more than 3% a year. But that isn't much help to retirees moving to the state now ...
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