Best State Taxes for Early Retirement

[Deadlift]

I've been doing some research trying to figure out which state would be the best for early retirement in terms of income tax, property tax, and sales tax but it's been pretty tough for me to simplify the different structures from each state to get an "effective rate" overall.

For a family who is retired early, living on 30-40k per year, and living in a house worth 300-400k is there a consensus for most tax advantageous states?

[arebelspy]

I've been doing some research trying to figure out which state would be the best for early retirement in terms of income tax, property tax, and sales tax but it's been pretty tough for me to simplify the different structures from each state to get an "effective rate" overall.

That'll depend on the specifics of you: what size property, for example, will affect the taxes, and could push one state over another if you choose a big property (that has lower taxes in one state, so the calculation would prefer that state in that scenario) versus a small one (where another state may be bumped above that due to its lack of income tax), how much you spend on taxable items (for sales tax), etc.

You'll need to pick based on your specific scenario, and the rough general one you gave isn't quite there.  :)

[MKinVA]

Search for cheapest places to live. Various money magazines have standards they apply to come up with the list (e.g., Kiplingers, Forbes). I find a lot depends on how you get your income. Is it a pension, taxable accounts, tax-advantaged accounts, a side hustle, etc. For me it might be income tax free state, for you it might be low real estate taxes.

[foobar]

An income tax free state might be a loss for the OP. Imagine he is living in a 400k house and making 40k year.

His choices are low tax  Texas or  high tax CA:

Ca Income tax: 729
CA property tax: ~5k (will vary a little bit but generally it is a bit over 1% and this is ignoring prop 13 )

Texas
Income Tax 0%
Property tax ~8k (varies a bit but 1.5-2.5% covers most areas)

Hmm turns out you pay an extra 2k to live in that "low" tax state. Up the income to 80k and things reverse.

People obsess about income tax rates. For low income people, property taxes and sales tend to matter just as much.

I would figure out what 3 or 4 states you want to live in and then run the numbers. Personally I think the numbers will all be with in a  couple thousand of dollars so I wouldn't factor that into my choice. Up your income to 100k, you will start seeing 10k+ difference in taxes between states.

Search for cheapest places to live. Various money magazines have standards they apply to come up with the list (e.g., Kiplingers, Forbes). I find a lot depends on how you get your income. Is it a pension, taxable accounts, tax-advantaged accounts, a side hustle, etc. For me it might be income tax free state, for you it might be low real estate taxes.

[SnackDog]

"States that have no income tax or exempt pensions and Social Security income, and that also have low property and sales taxes top the list.  These states are: Alaska, Nevada, Hawaii, Wyoming, Florida, Louisiana, Delaware, and Mississippi."

Hawaii and Delaware have high housing costs, Alaska has high COL, so that leave NV, FL, LA, MS and WY.  FL, LA and MS are too hot for me. WY is too remote. I would go for NV because it is near CA and you can gamble and ski!

http://taxes.about.com/od/statetaxes/a/Best-States-for-Retirees.htm

[Spork]

An income tax free state might be a loss for the OP. Imagine he is living in a 400k house and making 40k year.

His choices are low tax  Texas or  high tax CA:

Ca Income tax: 729
CA property tax: ~5k (will vary a little bit but generally it is a bit over 1% and this is ignoring prop 13 )

Texas
Income Tax 0%
Property tax ~8k (varies a bit but 1.5-2.5% covers most areas)

Hmm turns out you pay an extra 2k to live in that "low" tax state. Up the income to 80k and things reverse.

Yes and no.  Yeah the tax rates here (Texas) are higher.  There is a reason: the properties are cheaper.  A 400k house in Texas is likely to be HUGE (which comes with its own costs).     It might still work out -- again depending on specifics.

There are other things to compare, too.  I'm going to go out on a limb and say you probably get more services in California than Texas (and that's ok with me... but it might not be okay with you). 

There are numerous other costs of living that may be higher in one place than the other: food, insurance, etc.

That's all to say that this is a pretty difficult thing to compare.

[BigRed]

You need to consider sales taxes, too.  In retirement, your income and consumption will be roughly equivalent.  High sales taxes will be brutal.  Also, with a low income mustachian lifestyle, a progressive income tax structure will benefit you as well.

Everyone has focused on property and income taxes, but sales taxes are going to be very important in the analysis of a mustachian lifestyle.  Also consider whether your consumption patterns will include items subject to sales tax or not.

[Spork]

...and all the hidden taxes as well.  For example the various fees like auto tags may vary wildly.  Surcharges may be added to utilities, etc. 

[MKinVA]

It's also important to evaluate the things you like to do. Living in a larger cosmopolitan area might mean free concerts and shows, bands in the park, cheaper mass transit, better library system, on and on. Some areas of the country are really cheap to live in and there's good reason for that.

[foobar]

Yep specifics matter. 400k in ca could be an efficiency in SF or a 3000 sq ft house in the shadow of mount shasta. In texas is could be 2/2 in downtown austin or a ranch in the middle of no where.

As far as services, I draw the line at places that make you pay for your own fire service:)

An income tax free state might be a loss for the OP. Imagine he is living in a 400k house and making 40k year.

His choices are low tax  Texas or  high tax CA:

Ca Income tax: 729
CA property tax: ~5k (will vary a little bit but generally it is a bit over 1% and this is ignoring prop 13 )

Texas
Income Tax 0%
Property tax ~8k (varies a bit but 1.5-2.5% covers most areas)

Hmm turns out you pay an extra 2k to live in that "low" tax state. Up the income to 80k and things reverse.

Yes and no.  Yeah the tax rates here (Texas) are higher.  There is a reason: the properties are cheaper.  A 400k house in Texas is likely to be HUGE (which comes with its own costs).     It might still work out -- again depending on specifics.

There are other things to compare, too.  I'm going to go out on a limb and say you probably get more services in California than Texas (and that's ok with me... but it might not be okay with you). 

There are numerous other costs of living that may be higher in one place than the other: food, insurance, etc.

That's all to say that this is a pretty difficult thing to compare.

[seattlecyclone]

You need to consider sales taxes, too.  In retirement, your income and consumption will be roughly equivalent.  High sales taxes will be brutal.  Also, with a low income mustachian lifestyle, a progressive income tax structure will benefit you as well.

Everyone has focused on property and income taxes, but sales taxes are going to be very important in the analysis of a mustachian lifestyle.  Also consider whether your consumption patterns will include items subject to sales tax or not.

Honestly, I don't think Mustachians should worry much about sales taxes. Most states set up their sales taxes so that the basic necessities of life are exempt. Take a look at MMM's 2013 spending. What categories in there are likely to include purchases that would be subject to sales tax in most states? Hint: there aren't many.

As far as I know, most states don't charge standard sales tax on groceries, medical services, insurance payments, gasoline, public transit fares, and utilities. Those items collectively make up the majority of MMM's budget. I count perhaps $7k of expenses that would be subject to sales taxes. That figure is likely high because I lumped the entire "travel" category in there even though a lot of it is likely airfare (exempt from state sales taxes), and Crossfit (not sure if this would be counted as a non-taxable "service" in many states or not). So you're looking at perhaps a $700 difference in your annual sales tax bill between a high sales tax state (10% sales tax) and a sales-tax-free state. I think you'll find a much bigger variation in property taxes between states.

[beltim]

As far as I know, most states don't charge standard sales tax on groceries, medical services, insurance payments, gasoline, public transit fares, and utilities.

13 states tax groceries:http://taxfoundation.org/blog/monday-map-sales-tax-exemptions-groceries

All states tax gasoline: http://taxfoundation.org/article/state-gasoline-tax-rates-2009-2013

[seattlecyclone]

As far as I know, most states don't charge standard sales tax on groceries, medical services, insurance payments, gasoline, public transit fares, and utilities.

13 states tax groceries:http://taxfoundation.org/blog/monday-map-sales-tax-exemptions-groceries

As I said, most states don't tax groceries. Of those that do, half charge a reduced tax rate on groceries.

All states tax gasoline: http://taxfoundation.org/article/state-gasoline-tax-rates-2009-2013

You're paying tax on the gasoline, sure. But you aren't having the standard sales tax rate tacked on to the price you see at the pump. I have not heard of any state that does that. The tax is included in that price you see, and is a different rate than the standard sales tax rate. Thus I don't think it's useful to lump gasoline into the category of "things you pay sales tax on." It's a separate tax. It needs to be considered as part of the overall package, sure, but not in the sales tax category.

[Spork]

Yep specifics matter. 400k in ca could be an efficiency in SF or a 3000 sq ft house in the shadow of mount shasta. In texas is could be 2/2 in downtown austin or a ranch in the middle of no where.

As far as services, I draw the line at places that make you pay for your own fire service:)

I think we're agreeing... but my point was that the average home price in Tx is about half what it is in Ca.... and that's why the tax rate is higher.  They're trying to raise a similar amount of money based on a lower tax base.

Average prices by state  -- maybe that needs to be intersected with property tax/income tax/etc to find a more mathematical number.

[Nords]

I've been doing some research trying to figure out which state would be the best for early retirement in terms of income tax, property tax, and sales tax but it's been pretty tough for me to simplify the different structures from each state to get an "effective rate" overall.

For a family who is retired early, living on 30-40k per year, and living in a house worth 300-400k is there a consensus for most tax advantageous states?

"States that have no income tax or exempt pensions and Social Security income, and that also have low property and sales taxes top the list.  These states are: Alaska, Nevada, Hawaii, Wyoming, Florida, Louisiana, Delaware, and Mississippi."

Hawaii and Delaware have high housing costs, Alaska has high COL, so that leave NV, FL, LA, MS and WY.  FL, LA and MS are too hot for me. WY is too remote. I would go for NV because it is near CA and you can gamble and ski!

http://taxes.about.com/od/statetaxes/a/Best-States-for-Retirees.htm

A decade ago "Wealth" magazine used to rank states for both workers and retirees.  Hawaii was consistently in the top 10 and occasionally in the top three.  They were sold to another publisher in 2005 and I haven't found a good survey that splits out worker expenses from retirees.

Pensions & SS are exempt from taxation.  A single-family home with a resale value of $600K can pay less than $2500/year in property taxes.  (Condos and townhouses may be even less.)  It's possible to rent cheaply here, although it's difficult to find a cheap place.  Hawaii uses an excise tax, not a sales tax, so its 4% rate is deceptive and probably not accurately accounted for in the ranking algorithm. 

However Hawaii is also ranked quite highly on air quality, outdoor lifestyle, and longevity.  So I guess it depends on how you like your climate...

[Spork]

Pensions & SS are exempt from taxation.  A single-family home with a resale value of $600K can pay less than $2500/year in property taxes.  (Condos and townhouses may be even less.)  It's possible to rent cheaply here, although it's difficult to find a cheap place.  Hawaii uses an excise tax, not a sales tax, so its 4% rate is deceptive and probably not accurately accounted for in the ranking algorithm. 

Woah there.  That is a little out of date.  Social security started getting taxed in 1983.  AND WORSE: They didn't index it to inflation.  So all the inflation that has occurred since 1983 is an effective tax rate increase on social security income.... and the rate gets pretty steep pretty fast.

edit to add:  rereading... and ... you may be trying to say people on SS income are exempt from property taxes and state income taxes in Hawaii (which I obviously know nothing about).   My comment applies to Federal taxation.

[greaper007]

"States that have no income tax or exempt pensions and Social Security income, and that also have low property and sales taxes top the list.  These states are: Alaska, Nevada, Hawaii, Wyoming, Florida, Louisiana, Delaware, and Mississippi."

Hawaii and Delaware have high housing costs, Alaska has high COL, so that leave NV, FL, LA, MS and WY.  FL, LA and MS are too hot for me. WY is too remote. I would go for NV because it is near CA and you can gamble and ski!

http://taxes.about.com/od/statetaxes/a/Best-States-for-Retirees.htm

I lived in Florida for about 3 years, and I have to say that summers in Florida really aren't that bad.   The key is to live within 3-5 miles of the beach, you get the prevailing winds and it stays much cooler than the inland.

Then again, I seem to have a really wide temperature spread.   I spent a winter in Rochester and didn't think it was that bad either.   Even though it took until April to realize that all those sticks in the snow were marking fire hydrants.

[TomTX]

An income tax free state might be a loss for the OP. Imagine he is living in a 400k house and making 40k year.

His choices are low tax  Texas or  high tax CA:

Ca Income tax: 729
CA property tax: ~5k (will vary a little bit but generally it is a bit over 1% and this is ignoring prop 13 )

Texas
Income Tax 0%
Property tax ~8k (varies a bit but 1.5-2.5% covers most areas)

Hmm turns out you pay an extra 2k to live in that "low" tax state. Up the income to 80k and things reverse.

Yes and no.  Yeah the tax rates here (Texas) are higher.  There is a reason: the properties are cheaper.  A 400k house in Texas is likely to be HUGE (which comes with its own costs).     It might still work out -- again depending on specifics.

Yep, if you are running these numbers - you can figure that a house in Texas costs maybe 55% of an an equivalent house in California. Sure, you can pay more for a house in Texas than Cali, but this is an average. Makes Cali look a lot worse on property tax.

Then you have to consider other things - that house in Texas will (probably) be running the AC a lot more in the summer. But California has higher sales tax. How efficient is your AC? How much stuff will you buy?

Or buy a high-priced house in Hawaii, set up a cistern and pay virtually nothing for heating/AC and water.

[Jamesqf]

Hawaii and Delaware have high housing costs, Alaska has high COL, so that leave NV, FL, LA, MS and WY.  FL, LA and MS are too hot for me. WY is too remote. I would go for NV because it is near CA and you can gamble and ski!

Sorry, Nevada's full.  And gambling is effectively a tax on stupidity, so you might discover that it's not such a low-tax state after all :-)

Yep, if you are running these numbers - you can figure that a house in Texas costs maybe 55% of an an equivalent house in California. Sure, you can pay more for a house in Texas than Cali, but this is an average. Makes Cali look a lot worse on property tax.

You also have to figure that looking at average cost really doesn't help much in California.  There are places, like the Bay Area & parts of LA, where extremely high costs drive up the statewide average.  A house in say Atherton is going to cost WAY more than a similar one in Yreka or Susanville.