Grow Old with Me – Live (Almost) Tax-Free

What will you look for as you approach your "golden" years? Sunshine and the beach at your feet, or colder climates with your favorite cross-country skiing course outside your door? An affordable condo on the golf course with room for a visit from your grandchildren? Friends and family close by, or new "elder" friends living in close proximity? Excellent medical facilities nearby?

While the income of older Americans may be freer from encumbrances of children or work- related expenses, the expenses of daily living must still be planned for cautiously. Income must be managed appropriately so that it’s available to meet ongoing expenses, and higher health care costs.

In addition to considering these lifestyle questions as you decide where your retirement haven will be, you should study the affect of state tax structures on your projected retirement income. Before listening to the siren song of any one state to grow old within its borders, look at the following key tax areas:

Taxation of earned and investment income. If you plan on continuing to work, some states treat seniors like everyone else on their income tax rolls; some give them tax breaks on earned income and some have no tax on earned income. Tax rates on investment income have just as much variation. Be aware that several states tax former residents on individual retirement account (IRA) withdrawals; if you move, you may have to pay income taxes in two states. And, watch out for unexpected municipal income taxes.

Pension income taxation. Income from military, government and private pension plans is, in many cases, key to the financial survival of seniors. Some states exempt all pension income from taxation, while others exempt certain types of pension income or place caps on non-taxable pension income. For those who want to maximize their pension income, some of the "winning" states include Alabama, Hawaii, Illinois and Pennsylvania.

Taxes on Social Security benefits. Some states do not tax Social Security at all, while others follow federal tax formulas for determining tax on benefits. Still others have their own formulas to determine tax due on Social Security.

Property tax. This is another area where some states offer advantages to seniors. The leaders in breaks on property taxes include Hawaii, Alabama, Colorado, Wyoming, and Louisiana. Other states, among them Florida, Texas, and Oklahoma, offer homestead exemptions that can be helpful in reducing property tax burdens. Remember to check on personal property tax laws, especially on cars and boats.

Sales tax rates. Nearly every state, and often localities within each state, tax clothing, gas, household goods and sometimes even food and drugs. When you look at what you have budgeted out of your fixed income for these items, remember to add on for sales taxes if they will apply when you move to your retirement nest. The only "sales-tax-free" states are Alaska, Delaware, Montana, New Hampshire, and Oregon.

Estate taxes. While not affecting your cost-of-living as a senior, estate taxes are not to be overlooked when determining the feasibility of settling in one state over another. And, in some states, your spouse may be taxed on a portion of their inheritance which in another state would pass to them free of any estate tax, state or federal. Changes in state estate tax codes should be watched carefully.

Naturally, no single tax consideration should be used to determine the healthiest tax climate for your retirement years. You need to analyze your overall financial situation and then look at your retirement options. The advice of friends should be taken as just that, "friendly advice," with an understanding that their financial picture may be different from yours.

Your main aim should be to spend your senior years where you can mitigate financial stress--free to live the happy, healthy life you have earned.