Friday, October 13, 2017

Finding a Tax-friendly State to Call Home


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Wolters Kluwer Reviews State Tax Treatments of Retirement Benefits

(NEW YORK, NY, January 2017) — While the allure of warmer weather or being close to family are major factors in selecting a place to retire — so is calculating the best places to stretch a fixed retirement income. A little pre-retirement homework on state tax treatments of retirement benefits and other financial factors can be a key step in deciding where to establish new, post-career roots. Specific factors to consider include:
  • State taxes on retirement benefits
  • State income tax rates
  • State and local sales tax
  • State and local property taxes
  • State estate taxes
Taxability of Retirement Benefits Varies State to State
Currently, seven states do not tax individual income – retirement or otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Two other states – New Hampshire and Tennessee – impose income taxes only on dividends and interest (5 percent flat rate for both states).
In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemption or credits and some tax all retirement income.
States exempting pension income entirely for qualified individuals are Illinois, Mississippi and Pennsylvania.
States that exempt or provide a credit for a portion of pension income include: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia and Wisconsin.
States where pension income is taxed include: Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Rhode Island, Vermont and West Virginia.
(See chart below for additional detail.)
Significant State Tax Reforms
States enacting changes to their income tax laws for retirement plans in 2016 include:
  • Minnesota: Military retirement pay (including pensions) is deductible. (Change is effective beginning with 2016 tax year.)
  • New Jersey: The gross (personal) income tax exclusion on pension and retirement income is increased over a four-year period from $20,000 to $100,000 for married taxpayers filing jointly, from $15,000 to $75,000 for single and head-of-household filers, and from $10,000 to $50,000 for married taxpayers filing separately. (Change is effective beginning with the 2017 tax year.)
  • Rhode Island: Taxpayers who have reached the Social Security retirement age are eligible for a $15,000 exemption on their retirement income. This exemption applies to single taxpayers with federal adjusted gross incomes of up to $80,000 and for joint taxpayers with federal adjusted gross incomes of up to $100,000 that are otherwise qualified (these amounts will be adjusted annually for inflation). (Change is effective beginning with 2017 tax year.)
  • South Carolina: A new deduction for military retirement income is allowed. For taxpayers under 65 years of age, the deduction is $5,900 for the 2016 tax year, but increases by $2,900 each year until it is fully phased-in at $17,500 in 2020. For taxpayers 65 years of age or older, the deduction is $18,000 for the 2016 tax year, but increases by $3,000 each year until it is fully phased-in at $30,000 in 2020. (Change is effective beginning with 2016 tax year.)
While some states tax pension benefits, only 13 states impose tax on Social Security income: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide limited breaks for Social Security income, often for lower-income individuals.
 
(See chart below for full detail on State Taxation of Retirement Income.)
State Income, Property, Sales Taxes Can Add Up
In addition to state taxes on retirement benefits, other taxes to consider when evaluating financial factors on where to retire include:
  • State income tax rates: For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country.
    While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, Kansas, New Mexico, North Dakota and Ohio are below 5 percent. Some states have a relatively low flat tax regardless of income, with the five lowest: Colorado (4.63 percent), Illinois (3.75 percent), Indiana (3.23 percent), Michigan (4.25 percent) and Pennsylvania (3.07 percent) for 2017.
  • State and local sales taxes: Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax, although some Alaska localities do). States with a relatively high state sales tax rate of 7 percent include Indiana, Mississippi, Rhode Island, and Tennessee. California has a state sales tax rate of 7.25 percent. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.
  • State and local property taxes: While property values have declined over recent years in many areas, it has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.
  • State estate taxes: Estate taxes also can influence where seniors want to retire. Rules vary from state to state, as well as from federal estate tax laws. While some states, such as Delaware and Hawaii, follow the federal exclusion amount ($5,450,000 in 2016 and $5,490,000 in 2017), others do not. The latter category includes Illinois ($4 million), Massachusetts ($1 million), and New York ($2,062,500 for deaths on or after April 1, 2014, and before April 1, 2015, and $3,125,000 for deaths on or after April 1, 2015, and before April 1, 2016; and $4,187,500 for deaths on or after April 1, 2016 and before April 1, 2017).
Other states, including Arizona, Kansas and Oklahoma, no longer impose an estate tax. Still others, like California and Florida, technically still have such a tax on their books, but collect no revenue because their tax is based on the now-repealed federal credit for state death taxes. In general, this is an area of the law that has been in a considerable state of flux in recent years and will probably continue to be so in the foreseeable future.

State Taxation of Retirement Income

The following chart shows generally which states tax retirement income, including Social Security and pension income for the 2016 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.
STATESTATE TAX OF SOCIAL SECURITY INCOMESTATE TAX OF PENSION INCOME
AlabamaNot taxedExemption for defined benefit plans
AlaskaNo individual income taxNo individual income tax
ArizonaNot taxedGenerally taxable
ArkansasNot taxedExempt to certain level
CaliforniaNot taxedGenerally taxable
ColoradoExempt to a certain level; age restrictions applyExempt to a certain level; age restrictions apply
ConnecticutExemption based on adjusted gross income (AGI)Generally taxable
DelawareNot taxedExempt to a certain level; age restrictions apply
District of ColumbiaNot taxedGenerally taxable
FloridaNo individual income taxNo individual income tax
GeorgiaNot taxedExempt to a certain level; age restrictions apply
HawaiiNot taxedDistributions are partially exempt
IdahoNot taxedGenerally taxable
IllinoisNot taxedAll income from federally qualified pension plans are generally exempt
IndianaNot taxedGenerally taxable
IowaNot taxedExempt to a certain level; age restrictions apply
KansasExemption based on AGIGenerally taxable
KentuckyNot taxedExempt to a certain level
LouisianaNot taxedExempt to a certain level; age restrictions apply
MaineNot taxedExempt to a certain level
MarylandNot taxedExempt to a certain level; age restrictions apply
MassachusettsNot taxedGenerally taxable
MichiganNot taxedExempt to a certain level; age restrictions apply
MinnesotaTaxedGenerally taxable
MississippiNot taxedNot taxed
MissouriExemption based on AGIExempt to a certain level; income restrictions apply
MontanaExemption based on AGIExempt to a certain level; income restrictions apply
NebraskaExemption based on AGIGenerally taxable
NevadaNo individual income taxNo individual income tax
New HampshireOnly dividends and interest are taxableOnly dividends and interest are taxable
New JerseySocial Security excluded from gross incomeExempt to a certain level; age and income restrictions apply
New MexicoTaxedExempt to a certain level; age and income restrictions apply
New YorkNot taxedExempt to a certain level; age restrictions apply
North CarolinaNot taxedGenerally taxable
North DakotaTaxedGenerally taxable
OhioNot taxedCredits for pension distribution or income allowed; age restrictions apply
OklahomaNot taxedExempt to a certain level
OregonNot taxedCredit for pension distribution or income allowed; age and income restrictions apply
PennsylvaniaNot taxedNot taxed; age restrictions apply
Rhode IslandExemption based on AGIGenerally taxable (beginning in 2017, exempt to a certain level; age and income restrictions apply)
South CarolinaNot taxedExempt to a certain level; age restrictions apply
South DakotaNo individual income taxNo individual income tax
TennesseeOnly dividends and interest are taxableOnly dividends and interest are taxable; exemption available with age and income restrictions
TexasNo individual income taxNo individual income tax
UtahPartial credit for Social Security benefits allowed; age and income restrictions applyPartial credit for retirement income allowed; age and income restrictions apply
VermontTaxedGenerally taxable
VirginiaNot taxedExempt to a certain level; age and income restrictions apply
WashingtonNo individual income taxNo individual income tax
West VirginiaTaxedGenerally taxable
WisconsinNot taxedExempt to a certain level; income restrictions apply
WyomingNo individual income taxNo individual income tax


State Tax Treatment of Social Security, Pension Income

The following chart provides a general overview of how states treat income from Social Security and pensions for the 2016 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.
STATESOCIAL SECURITY INCOMEPENSION INCOME
AlabamaState computation not based on federal. Social Security benefits excluded from taxable income.Payments from defined benefit plans exempt.
AlaskaNo individual income tax.No individual income tax.
ArizonaSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
ArkansasState computation not based on federal. Social Security benefits excluded from taxable income.Up to $6,000 total in retirement pay benefits and benefits received from an individual retirement account (IRA) is exempt.
CaliforniaSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
ColoradoPension income, including Social Security benefits, up to $24,000 may be subtracted from federal taxable income by those 65 and older, and up to $20,000 by those 55 through 64 years old.An individual taxpayer 55 through 64 years old can exclude up to $20,000 ($24,000 for a taxpayer aged 65 or older) in pension and annuity income.
ConnecticutJoint filers and heads of households with AGIs under $60,000, and single filers and married taxpayers filing separately with AGIs under $50,000; deduct from federal AGI all Social Security income included for federal income tax purposes. Joint filers and heads of households with AGIs over $60,000, and single filers and married taxpayers filing separately with AGIs over $50,000, deduct the difference between the amount of Social Security benefits included for federal income tax purposes and the lesser of 25 percent of Social Security benefits received or 25 percent of the excess of the taxpayer’s provisional income in excess of the specified base amount under IRC Sec. 86(b)(1).Individual taxpayer’s pension income is generally taxable.
DelawareSocial Security benefits subtracted from federal AGI.An individual taxpayer younger than 60 may deduct pension amounts of up to $2,000, and a taxpayer 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer 60 or older include dividends, capital gains, interest, rental income, and distributions from qualified retirement plans.
District of ColumbiaSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
FloridaNo individual income tax.No individual income tax.
GeorgiaSocial Security benefits subtracted from federal AGI.An individual taxpayer age 62 to 64 may exclude up to $35,000 of retirement income; an individual 65 or older may exclude up to $65,000. Up to $4,000 of the maximum exclusion amount may be earned income.
HawaiiSocial Security benefits subtracted from federal AGI.Distributions derived from employer contributions to pensions and profit-sharing plans are exempt.
IdahoSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
IllinoisSocial Security benefits subtracted from federal AGI.Income from federally qualified retirement plans, IRAs, retirement payments to a retired partner, and certain capital gains on employer securities are excluded.
IndianaSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
IowaSocial Security benefits subtracted from federal AGI.Married taxpayers age 55 or older filing a joint return may exclude up to $12,000 ($6,000 for an unmarried taxpayer) of pension benefits and other retirement pay. A special rule applies to a spouse filing separately.
KansasTaxpayers with a federal AGI of $75,000 or less are exempt from any state tax on their Social Security benefits.Individual taxpayer’s pension income is generally taxable.
KentuckySocial Security benefits subtracted from federal AGI.Up to $41,110 of retirement income from a pension plan, annuity contract, profit-sharing plan, retirement plan or employee savings plan, including IRA amounts and other similar income, is exempt.
LouisianaSocial Security benefits subtracted from federal AGI.Up to $6,000 of the pension and annuity income of an individual taxpayer 65 or older is exempt.
MaineSocial Security benefits subtracted from federal AGI.A recipient of retirement plan benefits under an employee retirement plan or an IRA may generally subtract from federal AGI the lesser of:
–$10,000, reduced by the total amount of the recipient’s Social Security benefits and Railroad Retirement benefits paid; or
–The aggregate of retirement plan benefits received by the recipient under employee retirement plans or IRAs and included in the individual’s federal AGI.
MarylandSocial Security benefits subtracted from federal AGI.Up to $29,400, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer age 65 or older
MassachusettsSocial Security benefits subtracted from federal AGI.Individual taxpayer’s pension income is generally taxable.
MichiganSocial Security benefits subtracted from federal AGI.For individuals born prior to 1946, up to $49,861 in pension and retirement income is deductible on a single return ($99,723 on a joint return). Individuals born from January 1, 1946, to January 1, 1950, can deduct up to $20,000 ($40,000 on a joint return) against all income, but cannot deduct pension and retirement benefits. For individuals born between January 2, 1950, and December 31, 1952, up to $20,000 in pension and retirement income is deductible on a single return ($40,000 on a joint return) in lieu of claiming the social security deduction and personal exemption. Individuals born from January 1, 1953, to January 1, 1955, who have reached age 62 and receive retirement benefits from employment exempt from Social Security may deduct up to $15,000 ($30,000 on a joint return) in qualifying pension and retirement benefits
MinnesotaState computation begins with federal taxable income. No subtraction.Individual taxpayer’s pension income is generally taxable.
MississippiState computation not based on federal. Social Security benefits exempt in total.Retirement allowances, pensions, annuities or “optional retirement allowances” (income from Keogh plan, IRA or deferred compensation plan) are exempt.
MissouriSocial Security benefits that are included in federal AGI may be subtracted. Married couples with Missouri AGI greater than $100,000 and single individuals with Missouri AGI greater than $85,000, may qualify for a partial deduction.Combined return filers with Missouri AGI less than $32,000, single filers with Missouri AGI less than $25,000, and married filers filing separately with Missouri AGI less than $16,000 may deduct $6,000 ($12,000 combined filers) of their private retirement benefits, to the extent the amounts are included in their federal AGI.
Partial exemptions available to taxpayers with income levels above the AGI limits listed above.
MontanaSeparate calculation to determine taxable Social Security benefits. Benefits exempt if income is $25,000 or less for single filers or heads of households, $32,000 for married taxpayers filing jointly, and $16,000 for married taxpayers filing separately.For an individual taxpayer, up to $4,070 of pension and annuity income is exempt (reduced by $2 for every $1 of federal AGI that exceeds $33,910)
NebraskaSocial Security benefits subtracted if taxpayer’s federal AGI is less than or equal to $58,000 for joint filers or $43,000 for all other filers.Individual taxpayer’s pension income is generally taxable.
NevadaNo individual income tax.No individual income tax.
New HampshireOnly dividends and interest are taxable.Only dividends and interest are taxable.
New JerseyState computation not based on federal. All Social Security benefits are excluded by statute from gross income. Taxpayers age 62 or older who did not receive Social Security benefits, but would have been eligible for benefits, may qualify for a special exclusion of up to $6,000 for joint filers, heads of household, or surviving spouses; or up to $3,000 for single filers or married taxpayers filing separately.Taxpayers age 62 or older with total income of $100,000 or less may exclude pensions, annuities or IRA withdrawals of up to $20,000 for joint filers; $10,000 for married taxpayers filing separately; or $15,000 for a single taxpayer, a head of household, or a qualifying widow(er). (Exclusion amounts increased over four-year period beginning with 2017 tax year.) Taxpayers who did not claim the maximum pension exclusion amount because pension income was less than the maximum exclusion amount for the taxpayer's filing status may use the unclaimed portion of the pension exclusion to exclude other types of income. 
New MexicoState computation begins with federal AGI. No subtraction.An individual taxpayer age 65 or older may exempt up to $8,000 of income (100% of income if age 100 or older and not claimed as a dependent on another return), including pension income, depending upon the individual's filing status and federal AGI. Joint filers and head-of-household filers with AGI over $51,000, married taxpayers filing separately with AGI over $25,500, and single filers with AGI over $28,500 are not eligible for this exemption
New YorkSocial Security benefits subtracted from federal AGI.For an individual taxpayer age 59½ or older, $20,000 of pension and annuity income is exempt.
North CarolinaSocial Security benefits subtracted from federal taxable income.Individual taxpayer’s pension income is generally taxable.
North DakotaState computation begins with federal taxable income. No subtraction.Individual taxpayer’s pension income is generally taxable.
OhioSocial Security benefits subtracted from federal AGI.A recipient of retirement income with an AGI of less than $100,000 may claim an annual credit ranging from $25 to $200, depending on the amount of retirement income received during the year. In lieu of the retirement income credit, taxpayers with an AGI of less than $100,000 receiving a lump-sum distribution on account of retirement (no age requirement) may claim a credit calculated using a formula based on the amount of retirement income received and the taxpayer's expected remaining life. Finally, in lieu of the $50 senior citizen income credit (credit eligibility is dependent on age not retirement income), an individual taxpayer age 65 or older with an AGI of less than $100,000 may claim a credit for a lump-sum distribution from a retirement, pension or profit-sharing plan equaling $50 times the taxpayer’s expected remaining life years
OklahomaSocial Security benefits subtracted from federal AGI.Up to $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer, but not to exceed the amount included in federal AGI.
OregonSocial Security benefits subtracted from federal taxable income.An individual taxpayer age 62 or older with household income of less than $22,500 ($45,000 for joint filers), Social Security and/or Railroad Retirement benefits of less than $7,500 ($15,000 for joint filers), and household income plus Social Security and/or Railroad Retirement Board benefits of less than $22,500 ($45,000 for joint filers) may claim a credit for pension income equal to the lesser of 9 percent of the individual’s net pension income or the individual’s state personal income tax liability.
PennsylvaniaState computation not based on federal. Social Security benefits not included in state taxable income.Retirement benefits received from eligible employer-sponsored retirement plans are generally exempt, including distributions from employer-sponsored deferred compensation plans, pension or profit sharing plans, 401(k) plans, thrift plans, thrift savings plans, and employee welfare plans. Distributions from an IRA are not taxable if the payments are received, including lump sum distributions, on or after reaching the age of 59½.
Rhode IslandSocial Security benefits subtracted from federal AGI if federal AGI is $80,000 or less for single, head of household, or married filing separate taxpayers; or $100,000 or less for married filing joint or qualified widow(er) taxpayersIndividual taxpayer’s pension income is generally taxable. (Beginning in 2017, taxpayers who have reached the social security retirement age are eligible for a $15,000 exemption on their retirement income. This exemption applies to single taxpayers with federal AGI less than $80,000 and for joint taxpayers with federal AGI less than $100,000 that are otherwise qualified)
South CarolinaSocial Security benefits subtracted from federal taxable income.An individual taxpayer receiving retirement income may deduct up to $3,000. A taxpayer age 65 or older may deduct up to $10,000.
South DakotaNo individual income tax.No individual income tax.
TennesseeOnly dividends and interest are taxable.Only dividends and interest are taxable. Taxpayers 65 or older with total income from all sources of $37,000 or less ($68,000 or less for joint filers) are exempt
TexasNo individual income tax.No individual income tax.
UtahState computation begins with federal taxable income. No subtraction. Partial credit for Social Security benefits allowed (age and income restrictions apply).An eligible retiree age 65 or older is allowed a nonrefundable retirement credit of $450. An eligible retiree under age 65 and born before 1953 is allowed a nonrefundable retirement credit equal to the lesser of $288 or 6 percent of the eligible retirement income for the taxable year for which the retiree claims the tax credit. These credits are phased out at 2.5 cents per dollar by which modified AGI exceeds $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for heads of household and joint filers.
VermontState computation begins with federal taxable income. No subtraction.Individual taxpayer’s pension income is generally taxable.
VirginiaSocial Security benefits subtracted from federal AGI.A $12,000 deduction is available to an individual taxpayer born before 1939. For taxpayers 65 and older born after 1938, the deduction is reduced dollar for dollar for every $1 that the taxpayer’s adjusted federal AGI exceeds $50,000 ($75,000 for married taxpayers). For a married taxpayer filing separately, the deduction is reduced by $1 for every $1 that the total combined adjusted federal AGI of both spouses exceeds $75,000.
WashingtonNo individual income tax.No individual income tax.
West VirginiaState computation begins with federal AGI. No subtraction.Individual taxpayer’s pension income is generally taxable. However, subject to some qualification, an individual taxpayer who, by the last day of the tax year, has reached age 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI.
WisconsinSocial Security benefits subtracted from federal AGI.Taxpayers age 65 or older may subtract up to $5,000 of income from a qualified retirement plan or from an IRA if federal AGI is less than $15,000 ($30,000 for married taxpayers).
WyomingNo individual income tax.No individual income tax.
SOURCE: Wolters Kluwer, 2017
Permission for use granted.

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