When you retire, you may consider moving to another state, for the weather or to be close to loved ones. State taxes, among other things (i.e. cost of living, etc.), should also factor into the equation.
While it may seem like a no-brainer to simply move to a state that has no personal income tax, such as Nevada, Texas or Florida, you should consider all of the taxes that can potentially apply to a state resident, including, but not limited to: income taxes, property taxes, sales taxes, and estate/inheritance taxes.
For example, suppose you have narrowed your decision down to two states: Texas and Colorado. Texas currently has no individual income tax, and Colorado currently has a flat 4.63% individual income tax rate. At first glance, Texas might appear to be much less expensive from a state tax perspective. However, this may not necessarily be the case. The average property tax rate in Texas is 1.93% of assessed value, while in Colorado the average property tax rate is only 0.62%. Similar cases occur within city limits which could potentially cancel out any savings in state income taxes between two states.
Furthermore, if the states you are considering have an income tax, also look at what types of income are subject to tax. Some states, for example, may not tax wages but they may tax interest and dividends. And some states offer tax breaks for pension payments, retirement plan distributions and Social Security payments.
Finally, watch out for state estate tax. Not all states levy an estate tax, but they can be expensive in states that do. Currently, estate taxes are levied in: CT, DE, HI, IL, ME, MA, MN, NY, OR, RI, VT, WA, and DC. Also note that some states my levy an inheritance tax (IA, KY, NE, and PA), while NJ and MD levy both estate tax and inheritance tax.
What it all comes down to is before deciding where you want to live in retirement, do your research and contact a tax professional. Taking these steps could avoid making a bad relocation decision when taxes are considered – one that could be difficult and expensive to unwind.