The Differences Between U.S. State Tax Laws In A Nut Shell.

 

If you are planning on moving to another state, you'll probably and hopefully will always want to do extensive research on what the state's about. Culturally, food, entertainment, work, etc. Besides all of these things you should always do some additional research on the tax burden you’ll face when you arrive in your new state. State taxes are important to everyone and can definitely have an impact on your living style and budgeting habits.

 

States can raise their revenue in a lot of ways. Some of these ways can include sales tax, excise tax, license tax, income tax, intangible tax, property tax, estate tax and inheritance taxes. Depending on where you're looking to live, you may end up paying all of them or - if you're lucky - just a few of them.

 

Let's have a look at some information regarding state income taxes, sales and fuel taxes, taxes on retirement income, property taxes and inheritance and estate taxes, as well as sales and fuel taxes. Hopefully this will give you some insight into which states would offer a lower cost of living, if you would consider moving to them. Today I've decided to just focus on some general facts and compare a few interesting states. In one of the following articles I will be talking about California's Tax laws, since that's the state I'm currently living in. I'll be also discussing some other states with very interesting tax laws this upcoming week, so stay tuned. Let's have a look.

 

Taxes by State

 

There are quite some factors to consider before deciding what state you'd like to move to if we just come from a taxation point of view. Different states could have different taxes and not all states have the same amount of taxes. These are some of the taxes that you should consider when evaluating the financial implications of where you'd like to move to.

 

*  State taxes on retirement benefits;
*  State income tax rates;
*  State and local sales tax;
*  State and local property taxes; and
*  State estate taxes.

 

States With NO Income Tax.

 

Believe it or not, but seven states do not tax individual income or retirement. These states happen to be Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states - New Hampshire and Tennessee - impose income taxes only on dividends and interest. In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only a partial exemption or credits and some tax all retirement income.

 

States exempting pension income entirely for those who qualify are Illinois, Mississippi and Pennsylvania. States exempting a portion of pension income include: Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Oklahoma, South Carolina, Virginia and Wisconsin. States generally taxing pension income include: Alabama, Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Rhode Island, Vermont and West Virginia.

Related Post:  Quarterly Taxes And Their Myths & Misconceptions.

 

Recent Significant State Tax Reforms

 

These are some of the states and districts that were proposing changes to their income tax laws in 2014.

 

  • Connecticut: To the extent that it is includable in federal gross income, 10 percent of state teachers’ retirement system income may be subtracted from Connecticut adjusted gross income (AGI) for the 2015 tax year; 25 percent for the 2016 tax year; and 50 percent for the 2017 tax year and thereafter.

 

  • District of Columbia: The personal income tax exclusion for pension, military retired pay, annuity income or survivor benefits from the District or the federal government is only applicable to tax years beginning before January 1, 2015.

 

  • Iowa: Applicable retroactively to January 1, 2014, Iowa fully exempts military pensions from the state personal income tax.

 

  • Kentucky: Gov. Steve Beshear proposed reducing the retirement income exclusion for taxpayers with a federal AGI of more than $80,000 and phase out for AGI over $100,000.

 

  • Nebraska: Social Security benefits — for taxpayers with an adjusted gross income of $58,000 or less for married persons filing jointly, and $43,000 or less for all others — are exempt from Nebraska’s personal income tax beginning in 2015.

 

While some states tax pension benefits, only 13 states impose tax on Social Security income: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide breaks for Social Security income, often for lower-income individuals.

 

State Income, Property & Sales Taxes Can Add Up

 

In addition to state taxes on retirement benefits, other taxes that you should consider when evaluating the financial implications of where they may retire can include the following.

 

  • State income tax rates: For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country.While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, Kansas, New Mexico and North Dakota are below 5 percent. Some states have a relatively low flat tax regardless of income, with the four lowest: Illinois (3.75 percent), Indiana (3.3 percent), Michigan (4.25 percent) and Pennsylvania (3.07 percent) for 2015.

 

  • State and local sales taxes: Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax). States with a state sales tax rate of 7 percent include Indiana, Mississippi, New Jersey, Rhode Island and Tennessee. California has a state sales tax rate of 7.5 percent. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.
Related Post:  Why I Would Consider Moving To These 2 States & You Should Too.

 

  • State and local property taxes: While property values have declined over recent years in many areas, it has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.

 

  • State estate taxes: Estate taxes also can influence where seniors want to retire. Rules vary from state to state, as well as from federal estate tax laws. While some states, such as Delaware and Hawaii, follow the federal exclusion amount ($5,430,000 in 2015), others do not. The latter category includes Illinois ($4 million), Massachusetts ($1 million), and New York ($2,062,500 for deaths on or after April 1, 2014, and on or before March 31, 2015, and $3,125,000 for deaths on or after April 1, 2015, and on or before March 31, 2016).

 

Other states, including Kansas, Oklahoma, and Arizona, no longer impose an estate tax. Other states like California and Florida, technically still have such a tax on their books, but don't collect revenue, because their tax is based on the now-repealed federal credit for state death taxes. In general, this is an area of the law that has been in a considerable state of flux during the past few years and will probably continue to be so in the future.

 

 

Impact of State Income, Property, and Sales Taxes

 

In addition to state taxes on retirement benefits, other taxes that you should consider when evaluating the financial implications of where you may want to move to include

 

State income tax rates.

 

For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country. Since some retirees will face higher federal income taxes, they may look more closely at states with lower or no income tax rates as one way to help offset their overall tax obligation. While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, New Mexico and North Dakota are below 5 percent. Some states have a relatively low flat tax regardless of income, with the three lowest: Indiana (3.4 percent), North Dakota (3.99 percent) and Pennsylvania (3.07 percent) for 2013.

 

State and local sales taxes. 

 

Related Post:  California & Their State Tax Laws Rundown.

Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax). Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate. States with the highest sales tax are: California (7.5%), Indiana (7%), Mississippi (7.0%), New Jersey (7.0%), Rhode Island (7.0%), Tennessee (7%), Minnesota (6.875%), Nevada (6.85%), Arkansas (6.5%), Washington (6.5%), and Connecticut (6.350%).

 

State and local property taxes. 

 

While property values have declined over recent years in many areas, that has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.

 

State estate taxes.

 

Estate taxes also can influence where seniors want to retire. Rules vary from state to state as well as from federal estate tax laws. For example, 18 states impose a tax on estates valued below the $5.25 million federal threshold for 2013 ($5.12 million for 2012); only Delaware, Hawaii and North Carolina use the federal exclusionary amount.

 

Although several states do not collect estate taxes, many still have estate tax laws on their books. For example, Texas does not currently collect estate taxes from residents, but its estate tax is still in its state Tax Code. Of the 29 states that do not collect estate taxes, 26, including Texas, are tied to the federal estate tax state death tax credit – meaning estate tax statutes remain in their Tax Codes. Only three states that do not collect estate taxes, Arizona, Kansas and Oklahoma, have actually repealed the estate tax from their Tax Codes and statutes.

 

“The American Taxpayer Relief Act of 2012 brings more clarity on the federal level that only estates above the $5 million mark indexed for inflation will be subject to the federal estate tax,” said CCH. “However, the threshold in some states can be below $1 million for state estate taxes, which can impose additional planning challenges.”

 

Bottom Line

 

There are a ton of things you could take in consideration before moving to a different state. I'd say it's worth giving it a good thought before taking action, since the move you will make can put you in a higher or lower living style category. Personally, I would be interested in states who do not tax individual income or retirement. Property Tax exemption states seem very appealing as well, although I wouldn't fully consider moving there unless I would have some Real Estate business to attend. Nonetheless, glad to know there are multiple options out there.

 

(Source:retirementliving.com)

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