CHICAGO - Researching warm-weather retirement destinations has been a mission for Catherine Keller and her sisters in recent years.
Besides a shared desire to leave shoveling and shivering behind after too many northern winters, Catherine Keller and her sisters, natives of Long Island, N.Y., are focused on how to keep their tax burdens as reasonable as possible in retirement — an issue that will soon preoccupy millions of baby boomers.
"Tax implications are really important to me," said Keller, 60, a bank loan officer who lives in Upper Saddle River, N.J. "You can adjust your way of living, but once you've settled you can't change your tax situation."
Keller, who is divorced, and her 58-year-old sister Patricia have gone on scouting trips to North Carolina, South Carolina and Florida the last three years, checking out property and other taxes as much as home prices and proximity to hospitals. Florida is the front-runner because it has no state income tax.
Another sister, Frances, 56 — who, like Patricia, still lives on Long Island — has settled on Mississippi to move to because it is one of two states, along with Pennsylvania, to fully exempt pension income from taxes.
If tax laws change as some states move to recruit retirees and others boost taxes to make up for declining revenue elsewhere, who knows what other places could emerge as attractive candidates as the sisters near retirement?
Retirement doesn't necessarily mean a light tax load. So pre-retirees whose savings aren't sufficient to carry them comfortably through the years ahead may find it particularly essential to assess their future tax situation.
But focusing exclusively on states that don't tax personal income, or those where property taxes are lighter, can be a mistake.
Anyone interested in relocating for retirement should look into all the taxes they might pay, including sales, income, property, excise, estate and inheritance.
When people ask retirement expert Tom Wetzel the cheapest places to live, he asks what they want out of their retirement.
"Property taxes are cheap in Louisiana, for example, if you just want to focus on price," said Wetzel, president of the Retirement Living Information Center in Redding, Conn. "But it may not be where you want to retire in terms of amenities and the things you're used to."
Leaving aside the more personal choices such as rural vs. urban, coastal vs. inland and family proximity vs. far-flung, here are some primary considerations by tax category.
Nine states don't have a broad-based personal income tax — seven (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) with no income tax at all and two (New Hampshire and Tennessee) that tax only dividends and interest.
That can be a big attraction, especially for people like Catherine Keller who expect to work at least part-time in retirement. "It would make sense to live someplace and not pay state taxes," she said. "Then maybe I could take an extra vacation every year."
Even for those who anticipate little retirement income, mandatory withdrawals from taxable retirement accounts will force them to pay state income taxes they might like to avoid. Withdrawals from 401(k)s are treated as ordinary income for federal tax purposes but taxation at the state level varies by state.
But the advantage of zero state income taxes can be significantly weakened by property taxes, which tend to be higher in states with no income taxes. Sales and other taxes also can lessen it, and less obvious cost issues or other concerns also may lurk.
For example, Florida has high water assessment rates and Nevada has the nation's highest foreclosure rate. A flood of foreclosures can pressure a community to cut services or boost property tax rates to make up for lost revenue.
"There is a benefit to looking at a state where they don't have a personal income tax," Wetzel said. "Just don't do a knee-jerk reaction and move someplace only because of that."
Property taxes may be most retirees' biggest tax concern, since in many cases they will exceed what they'd pay in income tax.
But the search for low rates is compounded by the fact they vary greatly by not only state but municipality, so it's necessary to check rates by locality.
You may want to call the tax assessors in areas that make your final cut. Some states and towns discount property taxes for seniors, largely to retain those who already live there.
Amanda Russell of Anchorage, Alaska, is only 34 but she already has property taxes in retirement on her mind. The single mom has been doing intensive online research, county by county, as she decides where on the West Coast to establish a "forever home" for her and Jason, the 4-year-old son she adopted during Peace Corps service in the South Pacific.
Currently paying $3,500 a year in property taxes on her 2,000-square-foot home in Anchorage, she dreams of the day she'll own a home outright and won't have to pay an amount in taxes so large it feels like rent.
"I think the primary consideration for a homeowner in retirement should be property taxes," said Russell, a technical writer and editor for a government contractor. "You've got a lot more security in hard times, and a lot less expense if property taxes are low or absent."
Research on property taxes notwithstanding, seniors may want to assess how much of their Social Security and pension benefits (treated separately below) will be taxed in a particular state.
Fortunately, there has been a trend away from states taxing Social Security in the last five years, according to Kathleen Thies, a state income tax analyst for Riverwoods, Ill.-based CCH Inc. However, this may slow as states try to hang on to dwindling revenue sources in tough economic times.
Where the tax remains, it can be a significant hit for low-income retirees who rely mostly or entirely on their Social Security checks to get by. Social Security provides the largest share of income for people 65 and over — 39 percent as of 2007, according to the Employee Benefit Research Institute.
Minnesota, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont and West Virginia are the only states that currently tax Social Security income, according to CCH, a publisher of tax information. Many other states provide some sort of exemption.
Some states exempt all pension income, others some and still others none, in which case it's treated as regular income. In general, however, there has been a similar movement toward easing the pension tax squeeze, allowing larger amounts to be exempt.
A typical exemption used to be for only the first $15,000 of pension income, Thies noted, while now it can run anywhere from $35,000 to $50,000.
"States are starting to catch on, (realizing) that if they want to keep these retirees they've got to keep these exemption levels a little higher," she said.
SALES AND EXCISE
People may underestimate the extent of sales taxes over the course of a year.
Sales and excise taxes are typically the most expensive state and local taxes, and last year it took Americans an average 14 days' wages to pay them, according to the Tax Foundation, a nonpartisan tax research organization based in Washington, D.C. That compared to 12 days' pay for property taxes and 10 days' pay for state income taxes.
Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — have no state sales tax. Among the remainder, according to CCH, Colorado is at the bottom of the scale with 2.9 percent while five states Indiana, Mississippi, New Jersey, Rhode Island and Tennessee top the list at 7 percent.
However, municipalities often have their own.
Consider the total of all types of taxes for a location, and keep an eye out for the prospect of increases.
"It's important to consider all taxes you will face in a new location, both state and local and particularly your property taxes," said Mary Lu Abbott, editor of Where to Retire magazine. "Many people make a mistake by focusing on only state income taxes, thinking if they move to a state with no income tax they will save. That's not necessarily so."