Kiplinger\'s Personal Finance - 04.2020

04/2020 KIPLINGER’S PERSONAL FINANCE 11

“mixed” rating from Kiplinger for the

way it taxes retirees, is phasing out

taxes on Social Security benefits over

three years, starting in 2020. In New

Mexico, which also gets a “mixed” rat-

ing, lawmakers are considering several

bills that would repeal or reduce taxes

on Social Security.

Even states that already have low

taxes are looking at ways to become

more appealing to retirees. For exam-

ple, Arizona Governor Doug Ducey’s

proposed budget for 2020 would elim-

inate state income taxes on military

pensions. Arizona is one of Kiplinger’s

most tax-friendly states for retirees.

Economic benefit or burden? The inde-

pendent research organization Think

New Mexico contends that eliminat-

ing or reducing taxes on Social Secu-

rity benefits would give retirees more

money to spend, which would boost

New Mexico’s economy. Think New

and 401(k) plans, state and local taxes
on other types of income—including
distributions from IRAs—can run as
high as 9%.
Fortunately for Marylanders willing
to relocate, a number of other states
give retirees a break. For example,
nearby Delaware and Virginia are
both friendlier to tax-conscious se-
niors, according to Kiplinger’s state-
by-state guide to taxes on retirees.
Alternatively, Marylanders can join
the thousands of retirees that have
stowed their snow shovels and moved
to Florida, which has no income tax
and is on Kiplinger’s list of most-tax-
friendly states.
Maryland Governor Larry Hogan
says high tax rates are driving out
lifelong Marylanders who still have
much to offer the state besides a
steady stream of tax revenue. Hogan,
a Republican, has introduced legisla-
tion that would eliminate state taxes
on the first $50,000 of income for re-
tirees making up to $100,000 in feder-
ally adjusted gross income. Retirees
with income of $50,000 or less would
pay no state tax. Hogan also wants to
exempt from tax all pension and re-
tirement income paid to veterans and
first responders. The tax cuts, which
would cost an estimated $1 billion,
would be phased in over five years,
beginning in fiscal year 2022.
The legislation faces an uncertain
future in the state’s Democratic-
controlled general assembly, where
lawmakers have raised concerns about
how the state would make up the reve-
nue from the tax reductions.
Other states are also looking at ways
to keep retirees from decamping to
lower-tax states. Illinois Governor J.B.
Pritzker recently signed legislation
that will make it easier for seniors in
Cook County—which includes Chicago
and is the state’s most populous juris-
diction—to apply for a property tax
break of up to $8,000 a year. Kiplinger
has designated Illinois as one of the
least tax-friendly states for retirees,
primarily because of its sky-high prop-
erty taxes. West Virginia, which gets a

Voting With Their Feet

The Gray Migration

States where the most retirees are moving,

based on the number of people age 60

and older who moved into a state versus

the number of people who moved out.

Mexico estimates that every dollar

of Social Security income generates

about $1.71 in spending on food, cloth-

ing, transportation and health care.

But reducing taxes on retirees could

force states to make costly trade-offs,

some tax analysts say. States with a

large number of retirees could see a

significant reduction in their tax base,

forcing them to cut services or raise

taxes on their younger residents, says

Kim Rueben, Sol Price fellow at the

Tax Policy Center.

“There are good reasons to want

people who have spent their lives

living and working in the state to stay

there,” says Jared Walczak, director

of state tax policy for the Tax Founda-

tion. But “as much as it’s great to know

that you’re a state that retirees want to

live in, it imposes a significant cost on

the rest of the population.”

It’s also unclear how much state

taxes inf luence retirees’ decisions

when it comes to choosing a retire-

ment destination. Proximity to family,

the quality of health care and the cost

of housing also play roles. “People

make decisions about where they’re

going to live for a whole host of rea-

sons, and taxes are not the major

one,” Reuben says.

Whether you’re planning to stay

put when you retire or move some-

where else, it’s important to include

the cost of federal and state taxes

when estimating your retirement

budget. State taxes are all over the

map: Some states exempt a significant

amount of income from retirement

plans and pensions, while others pro-

vide few breaks for retirees. Property

taxes, sales taxes and gas can also take

a bite out of your budget. Some states

also have estate and/or inheritance

taxes, which could reduce the amount

of money you leave to your children.

You can get a detailed breakdown

of each state’s taxes, including taxes

on retirement income, property and

purchases, as well as estate and inher-

itance taxes, using Kiplinger’s state-

by-state guide to taxes on retirees, at

kiplinger.com/links/retireetaxmap.

Source: SmartAsset analysis of 2017 census data.

State

Net

Migration

Florida 68,

Arizona 31,

South Carolina 12,

North Carolina 9,

Nevada 8,

Te n n e s s e e 8 , 2 5 9

Te x a s 8 , 2 9 6

Washington 3,

Idaho 2,

Delaware 2,