The Taxing State of Retirement

For many doctors, state and local taxes can be a key factor in their choice of where to retire. Unfortunately, many potential retirees don’t get past looking at the state’s income tax policy.

It’s tempting to decide on one of the seven states that don’t have an income tax, without realizing that states with no income tax often generate revenue in other ways, like sales taxes or property taxes. And some states that do have an income tax exempt the income from pensions, Social Security, and IRA withdrawals, which is likely to be the income that most retirees will live on.

According to the Tax Foundation, the average taxpayer will see 9.7% of his/her income go toward state and local taxes this year. New Jerseyans will bear the heaviest tax burden at an average 11.8%, with New Yorkers close behind at 11.7%. Connecticut comes in third, at 11.1%. States with low average tax levies include Alaska, Nevada, Wyoming, Florida, and New Hampshire.

But averages can be deceiving. A state-by-state analysis can show some of the trade-offs. For example, although New Jersey doesn’t tax Social Security benefits and exempts a portion of IRA and pension income, it has one of the highest sales tax rates in the nation, and its median property tax burden is the highest in the country—more than 40% higher than New Hampshire’s, which is in second place. Those New Hampshire property taxes partially offset the fact that the state only taxes income from interest and dividends. For a full rundown on state taxes and comparisons by state, go to RetirementLiving.com.