You are 55 years old, beginning to think about retirement, and it dawns on you that you’ve never considered the bite that state income taxes may take out of your income during retirement. You’ve likely ballparked in your head the amount of income your nest egg should generate and may have even been somewhat confident in a comfortable retirement. But your revelation now has you concerned that state taxes may crimp your retirement plans.
And even if you happen to live in one of the nine states with no state income tax, you are not off the tax hook. States without an income tax usually have much higher property and other tax rates that can easily offset the lack of a state income tax. There’s rarely a place to hide with it comes to taxes.
But don’t panic just yet. The tax bite may not be that big after all -- even in states with an income tax! That’s because many states offer 65+ year-olds extra personal exemptions, extra standard deductions and/or very generous retirement income exemptions – all of which can significantly reduce or eliminate taxes. Heck, three states that have a state income tax exclude ALL retirement income from taxation.
In one form or another, state taxes can impact the longevity of your nest egg so it’s an important consideration when planning the financial aspects of your retirement. Do the necessary planning (we give an easily implemented suggestion as to how) so you’re not surprised or harmed by your state’s tax bite in retirement.
State Tax Benefits for Senior Citizens Come in Many Forms
States with an income tax typically offer several ways to reduce taxable income regardless of age. These include standard deductions, personal exemptions and dependent (child) deductions, each of which vary in amount depending on the state and marital status.
Many states with income taxes offer additional and substantial benefits for retirees:
Extra personal exemption: In addition to a state’s normal personal exemption, about 19 states (AZ, AR, CA, DE, HI, IL, IN, IA, LA, MD, MA, MS, MT, NH, NJ, NM, OK, VA, WI) offer an extra personal exemption. The exemption ranges from $20 to $2,510, but typically averages about $1,000 for each spouse aged 65+.
Extra standard deduction: Another way a state lowers taxes for senior citizens is with an extra standard deduction, which averages $1,300 among the 10 states (DC, DE, GA, ID, ME, MN, MO, NE, OR, VT) that offer one. This extra deduction is added to the state’s normal standard deduction. The state then typically allows the larger of the combined standard deduction or your itemized deduction as a reduction to taxable income.
Retirement income exemption: In addition to either or both of the above exemptions/deductions, about 21 states (AL, AR, CO, DE, GA, IA, KY, LA, ME, MD, MI, MO, MT, NJ, NM, NY, OK, SC, VA, WV, WI) offer a retirement-income exemption for each spouse aged 65+, which is used to reduce the amount of taxable “retirement income.” The definition of retirement income varies by state but typically includes interest/dividend income, pensions and annuities, voluntary withdrawals from tax-deferred accounts after age 60, and minimum mandatory distributions from tax-deferred accounts. The exemption ranges from about $4,180 to $65,000 for each spouse in those states that offer a retirement exemption. Four states (IA, IL, PA, MS) that have a state income tax exempt ALL retirement income from state taxes.
No-tax states: The following seven states have no state taxes: AK, FL, NV, SD, TN, TX, WA, WY. Additionally, NH taxes only dividend and interest income. But remember, states without income taxes usually have higher rates in other areas (property taxes, sales taxes, city/county/school taxes), which combined often negate any income-based tax benefit.
Social security: Only nine states (CT, KS, MN, MO, MT, NM, RI, UT, VT) tax social security income. The remaining 41 states and the Dist. Of Columbia (DC) do not.
The Right Retirement Calculator Can Help
State income taxes can impact the longevity of your nest egg so it’s an important consideration when planning the financial aspects of your retirement. But there’s no need to panic over the possibility of a burdensome tax bill given the myriad exemptions, deductions and exclusions available for retirees.
Plus, there’s no need getting bogged down trying to determine (and remember) all of the exemptions and deductions for each state. Just use the Relax Retirement Planner – it automatically takes into consideration virtually every detail of each state’s tax rules (along with many other features) to give an accurate estimate of how long your savings will last. That way, there’ll be no surprises to spoil your retirement.