Tax-friendly Places to Retire: You'll Never Guess Which State is Not So Friendly

Mary Beth Franklin of Kiplinger's Personal Finance has an article in today's Washington Post entitled "Tax-Friendly Places for Retirement".

Because tax treatment of different retirement income sources, as well as real property, varies widely by state, the fifty states were not ranked best to worst. For those contemplating a move upon retirement, Kiplingers has this handy-dandy map of the US, which not only enumerates the positives and negatives of each state in various retirement-related tax categories - pension taxes, taxes on Social Security benefits, sales tax, property tax, income tax - but includes lists of the best and worst five states in these categories.

If you'd like to start your search for a retirement destination by at least determining which states to steer away from, look for the ones that are bad in several such categories. This is where we find Little Rhody.

Three states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, they also have high top tax brackets: California (9.55 percent on income less than $1 million), Rhode Island (9.9 percent) and Vermont (9.5 percent). Connecticut and Nebraska also fully tax retirement income.

Additionally, we are one of the top five worst states for property taxes and we are one of around fifteen states which assess an estate tax.

But we're all working stiffs. Why should we care how the state treats retirees tax-wise?

First and most selfishly, a couple of those taxes - property and income - apply to us as well.

Secondly ... okay, this one is pretty selfish, too - for the same reason we need to care about our corporate taxes and, more generally, the business climate: more taxpayers in the state means a broader tax base so that everyone pays less in taxes.

Finally, a note with regard to Kiplinger's citation of Rhode Island's top income tax bracket as 9.9%: their data may be slightly outdated as the Gov and the General Assembly have been slowly ratcheting back that rate. This only highlights the urgency, however, of undertaking the difficult but necessary task of making all of our tax rates at least middle of the road - so that Rhode Island no longer actively repulses taxpayers of all varieties by cropping up on the wrong end of lists such as this.