When you are thinking about retirement, you may consider moving to another state for one reason or another. Many people move to places with milder weather so they can enjoy outdoor activities all year around. Others relocate to be closer to family members that have moved away.
The cost of living, the climate, the health care system, and the recreational and leisure activities that are available will obviously be important factors. At the same time, you should put taxation in the mix as well, because you should understand what to expect before you make any decisions.
Florida, Alaska, Nevada, New Hampshire, Washington, Tennessee, South Dakota, Wyoming, and Texas do not have state income taxes at all. As a result, Social Security benefits, pensions, and individual retirement account distributions are not subject to state-level taxation.
More than 30 states that have state estate taxes do not tax Social Security distributions, and this would include our home state of Ohio. There is a mixed bag when it comes to taxes on pensions and IRA distributions. They are taxable for the most part, but the exact rules vary.
Estate and Inheritance Taxes
There is a federal estate tax that can affect all Americans, regardless of the state that you live in, but most estates are exempt. We have a credit or exclusion that allows you to transfer a certain amount before the tax would be imposed on the remainder.
At the time of this writing, the exclusion is $11.58 million, and this figure adjusted for inflation is supposed to remain constant until the end of 2025. It is scheduled to sunset at that time and revert back to the $5 million adjusted for inflation that was in place from 2011 through 2017.
We should touch upon the fact that there is a gift tax on the federal level, and it is unified with the estate tax. For this reason, you can’t give advance inheritances to your loved ones while you are still living to avoid the federal estate tax.
There are also state-level estate taxes in 12 states, and the District of Columbia has its own estate tax. We used to have an estate tax in Ohio, but a repeal went into effect at the beginning of 2013.
Many people that are in a position to move to a desirable retirement destination have enjoyed a good bit of financial success. The exclusions in the states that have estate taxes are typically lower than the federal exclusion.
For example, the lowest exclusions in the country are in Oregon and Massachusetts. These states have $1 million exclusions, and this figure is low enough to impact a significant number of successful retirees.
Hawaii is a dream retirement destination for many people, and there is an estate tax in the Aloha State with an exclusion of $5.49 million.
The most popular retirement spots have always been Florida and Arizona, and in addition to the weather, the tax situation is part of the appeal. There are no state-level estate taxes in these states, and Nevada could be in the mix as well. The southern part of the state has relatively mild winter weather, and there is no estate tax or state income tax in Nevada.
There are six states in the union that have state-level inheritance taxes. This is a tax that can be imposed on distributions to multiple different inheritors when one estate is being administered. These states are New Jersey, Maryland, Kentucky, Iowa, Nebraska, and Pennsylvania.
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