10 Least Tax-Friendly States for Retirees, 2019
Whether you plan to retire at the beach, near the mountains or to some other dream destination, make sure you check out the local tax situation before packing your bags. If you don't, you might be unpleasantly surprised by hefty state and local taxes in your new hometown.
State and local taxes can vary greatly from one place to another. The difference can easily exceed $10,000 or more per year in many cases, which is enough to break the bank for a lot of retirees. So, to avoid this kind of bombshell, make sure you do some research before settling on a new location. You can start with Kiplinger's State-by-State Guide to Taxes on Retirees, which has been updated for 2019. This tool maps out the tax landscape for each state and the District of Columbia, and allows you to do a side-by-side comparison for up to five states at a time.
We also identified the 10 states that impose the highest taxes on retirees, which are listed below (we saved the worst state for last). Our results are based on the estimated state and local tax burden in each state for a hypothetical retired couple with a mixture of income from Social Security, an IRA, a private pension, interest and dividends, and capital gains. We also gave them a $400,000 home (with a small mortgage) and $10,000 in deductible medical expenses. Take a look to see if your state--or the state you've been dreaming about for retirement--made our "least tax-friendly" list for retirees (we hope it didn't).
State income tax: 4% (on taxable income of $8,500 or less for single filers; $17,150 or less for joint filers) -- 8.82% (on taxable income over $1,077,550 for single filers; over $2,155,350 for joint filers)
Average state and local sales tax: 8.49%
Average property tax: $1,812 per $100,000 in home value
Estate tax/Inheritance tax: Yes/No
Unfortunately, the Empire State's heavy tax burden carries over into retirement--especially when it comes to property taxes. Based on New York's state-wide average tax rate, our hypothetical couple would pay about $7,246 each year in property taxes if they owned a $400,000 home in the state (more in certain pricey areas of the state, like New York City or Westchester County). That's the ninth-highest amount in the country. There are some property tax breaks for seniors, though. Local governments and public-school districts can reduce the assessed value of their home by 50%. To qualify, the homeowner must be 65 or older and meet certain income limitations and other requirements. An Enhanced STAR exemption is also available for the primary residences of senior citizens (age 65 and older) with annual household incomes of $86,300 or less for 2019. Under the program, the first $66,800 (for 2019 to 2020 school tax bills) of home value is exempt from school property taxes.
At 8.49%, New York's average combined (state and local) sales tax rate is the 10th-highest in the nation. However, food and drugs are exempt from taxes, as are health club memberships, less-expensive clothing and footwear, most arts and entertainment tickets, and a host of other items.
When it comes to income taxes, New York's tax bite is less severe for retirees when compared to other states. Social Security benefits, federal and New York government pensions, and military retirement pay are exempt. However, anything over $20,000 from a private retirement plan (including pensions, IRAs and 401(k) plans) or out-of-state government plan is taxed.
New York also has an estate tax--with an unusual "cliff tax" kicker. Generally, the tax is only imposed on that portion of an estate over the $5.74 million (for 2019) exemption. However, if the value of the estate is more than 105% of the exemption amount, the exemption won't be available and the entire estate will be subject to New York estate tax. Ouch!
SEE ALSO: 50 States Ranked for Taxes9. Illinois
State income tax: 4.95% (flat)
Average state and local sales tax: 8.78%
Average property tax: $2,408 per $100,000 in home value
Estate tax/Inheritance tax: Yes/Yes
There is some good tax news for retirees in Illinois: Social Security benefits and income from most retirement plans are exempt. Plus, the state's 4.95% flat income tax rate is relatively low.
Now for the bad news: Property taxes hit retirees hard in Illinois. The state-wide average property tax rate in Illinois is the second-highest in the nation--a staggering $9,634 per year on a $400,000 home. Fortunately, there is some relief for seniors in the form of a homestead exemption of up to $5,000 ($8,000 in Cook County), the ability to "freeze" a home's assessed value (must have income of $65,000 or less), and a tax deferral program (up to a maximum of $5,000).
Sales tax rates are high in Illinois, too. The state has the seventh-highest average combined state and local sales tax rate at 8.78%. In some locations, the rate can be as high as 11%!
Illinois also has an estate tax that applies to estates worth $4 million or more. That can be bad news for your heirs.
SEE ALSO: 18 States With Scary Death Taxes
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