Retirement Taxes and Senior Living
|Written by Ken Teegardin|
SeniorLiving.Org Expert on Chief Editor | Caregiver
So you’re planning to throw off the work shackles, retire, and start your second life. Congratulations! You’ve earned it. Maybe you’re leaving Wisconsin for the coast of Georgia? It’s beautiful and warm. Good choice.
Do you know how the Peach State taxes Social Security? How about your Civil Service pension? If you decide to work part-time do they have a personal income tax? What about property taxes? Is there a sales tax? Inheritance and estate tax?
When planning for retirement first think about what kind of lifestyle you want and how much it will take to afford that lifestyle. And even though you may no longer be working, the government is still going to want you to pay taxes.
How much you’re taxed will depend on (1) where you live, (2) what kinds of income you’re receiving and (3) how much.
Taxable Social Security
Many states don’t tax Social Security benefits, but it’s still counted as taxable income. Here are some general guidelines to find out if you’ll owe federal income tax on your Social Security income:
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- If you’re single with a combined total income (all sources) of less than $25,000 you won’t be taxed on your Social Security benefit.
- Single with a combined income between $25,000 and $34,000, 50% of your benefit will be taxable.
- Single with income over $34,000, 85% of your benefit could be taxable.
- Married couples filing jointly, combined income below $32,000 is not taxed. Between $34,000 and $44,000, it’s taxable up to 50%. Over $44,000 is taxable to 85%.
IRAs and 401(k) Taxes
Once you reach 59 1/2, you won’t be penalized (10%) for early withdrawal on your IRA or 401(k). But you’ll still pay the applicable state and federal income tax which varies widely from state to state.
Some states have a dizzying array of tax credits, exemptions and scenarios too numerous to list. Roth IRAs are exempt because they’ve already been taxed.
In some states like Maryland you’re able to subtract your retirement pension unless it’s from an out-of-state government pension. In other states, Alabama for example, you can subtract any out-of-state government pension from your taxable income.
Some states follow federal tax rules for military retirement while others give these retirees tax benefits. Here's where you'll get tax benefits for your service:
Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming.
If you’re receiving military disability pay, most states exempt this from federal income tax.
Estate and Inheritance Tax
The Federal estate tax (inheritance) is a tax on the fair market value of your property after you pass away. This generally includes cash, securities, real estate, insurance, annuities, trusts and other assets. The total of these items is your “Gross Estate”. Certain deductions (funeral expenses, charitable donations, etc.) can be taken that result in your “Taxable Estate”.
The states with the highest Federal estate tax? Connecticut, Florida, California, New York, Arizona.
In addition to the Federal estate tax, most states have limited estate taxes; some have no estate tax at all.
State Sales Tax
Sales tax is collected in all states but Alaska, Delaware, Montana, New Hampshire and Oregon. These states have the highest sales tax:
- California (8.25%)
- Indiana (7%)
- Mississippi (7%)
- New Jersey (7%)
- Rhode Island (7%)
- Tennessee (7%)
- Minnesota (6.875%)
- Nevada (6.85%)
- Arizona (6.6%)
- Washington (6.5%)
- Kansas (6.3%)
- Texas and Illinois (6.25%)
Updated: Feb 10, 2011