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Wednesday, February 13, 2008

Where to Live in Retirement

The article "Where to Live in Retirement" is from Page two of the May 2007 issue of "The Retirement Advisor." Click these for Free Sample Issue and Performance Data.

The decision of where to live in retirement can be one of the most important ones you make. Obviously, the decision is an important one in terms of the quality of your life where factors such as proximity to family, recreational opportunities, and even weather can play a role. However, deciding where to live in retirement also can have a significant impact on your financial well-being. We at The Retirement Advisor have found that very few investment advisors address this issue and thought our subscribers would benefit from a discussion of this topic. This month, we tackle the issue of taxes and retirement.

Income Taxes

It is no coincidence that Florida remains one of the favorite states for retirees. In addition to the warm and sunny weather, Florida does not have any income tax on earned income or unearned income such as interest and dividends.

When you are in retirement, interest and dividends can be a key source of money that pays for your living expenses. The less of your interest and dividends that goes to pay taxes, the more that you get to keep and spend in retirement.

There are seven states in the United States that do not levy an income tax on earned and unearned income. These states all provide a possible starting point in formulating a decision of where you might want to spend your golden years. The seven states are:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

Two others, states, New Hampshire and Tennessee do not levy tax on earned income; nevertheless, they do levy taxes on unearned income and dividend income.

The Federation of Tax Administrators has compiled a detailed analysis of each state’s individual income tax rate and it is now available online. The information includes the tax rates, the income brackets and personal exemptions. The information was just updated and is current for tax year 2007. We recommend that our subscribers bookmark their web site which you can find at the following URL:

Sales Taxes

Even if your income is not subject to state income tax, or your state has a low income tax rate, it doesn’t matter too much if what you purchase with your money is subject to high sales taxes. After all, in retirement, you are now spending the money you previously saved and you want your dollar to go as far as it can.

State sales tax rates can range dramatically. There are only five states that have no state sales taxes, including Alaska, Delaware, Montana, New Hampshire and Oregon. On average, most states levy a sales tax of around 4-5%. However, at least five states have sales taxes that are 7% or higher, including California, Mississippi, New Jersey, Rhode Island and Tennessee. A few states have exemptions on sales taxes for such items as food, prescription drugs and non-prescription drugs. The following URL will bring you to a web site that shows a state-by-state breakdown of sales taxes:

Individuals approaching or in retirement, should also be aware that many states have tax “holidays” each year. In 2007, for example, Alabama, Connecticut, Georgia, Florida, Iowa, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Virginia and the District of Columbia all designate specific dates (usually in August) where consumers can purchase various items without paying sales tax. Typically, the tax holiday applies to items such as clothing, school supplies, and computers. For many consumers, waiting to purchase these items until a tax holiday represents a significant savings, although most states do place a cap on the amount you can purchase during the tax holiday. Nevertheless, a penny saved is a penny earned. You can find a table of each state’s tax holidays and information about what is covered at this URL:

State Taxation of Social Security and Pensions

For many individuals in retirement, their pensions and social security can account for a significant portion of their retirement income. Ten years ago, the AARP (formerly named the American Association of Retired Persons) Public Policy Institute prepared a brief that addressed the personal income tax treatment of Social Security benefits and pension income for the 41 states and the District of Columbia that have a broad-based income tax. That publication was updated in 2001 and subscribers can use it to help them make decisions on where to retire based on differences in tax treatment. Subscribers can find the publication by going to the following URL and clicking on the section entitled, “Issue Brief (PDF)”:

We will address other issues related to the topic of where to retire in future newsletters. If there is a specific area that you would like discussed, please e-mail us.

The article "Where to Live in Retirement" is from Page two of the May 2007 issue of "The Retirement Advisor." Click these for Free Sample Issue and Performance Data.

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