In 2019, professional baseball player Bryce Harper signed the largest free-agent deal in the history of North American sports up to that time—$330 million dollars to play for the Philadelphia Phillies for 13 years. He had similar offers from the Los Angeles Dodgers and the San Francisco Giants. But one of the major factors in Harper’s decision was—taxes.
California’s state income tax rate is 13.3%. The rate in Pennsylvania is just 3.07%. Harper saved tens of millions in taxes by going to Philly. His agent, Scott Boras said, “It could be almost a full year’s compensation.”
Deciding how to create the best retirement, just like deciding which franchise to play for, requires research. In the past, retirees often considered their long-term future based on better weather, a better cost of living or being closer to the kids and grandkids. Today, just like Bryce Harper’s decision, tax implications can be a driving force.
The current federal tax law caps the itemized deduction for state and local taxes at $10,000 a year. Many residents of high-tax states such as New York, New Jersey and California pay well above the $10,000 limit on SALT deductions. Every year they remain in a high-tax state will cost them money in the form of higher federal taxes, less money in their pocket and possibly higher Medicare premiums.
That was the case for the mother of a New York Congresswoman who believes in high taxes. Blanca Ocasio-Cortez left New York where her property taxes were $10,000 a year. In Florida her annual property tax bill is $600. The top state income tax rate in New York is 8.82%. Florida has no state income tax.
High-tax states in the Northeast have been losing residents to other parts of the country, particularly to the warmer and lower-cost South. The Census Bureau’s Current Population Survey shows the Northeast lost more than 350,000 residents to net migration between 2017 and 2018. The largest loser was New York, with a net migration of more than 190,500 residents, followed by New Jersey with a loss of more than 57,000 residents.
Where are they going? Of the approximately 600,000 people who left the Northeast, more than two-thirds — about 412,000 people — moved south. The top destination was Florida, which just happens to have no state income tax.
Nevada, which has no income tax and Arizona, with tax rates ranging from 2.59%-4.54%, also saw population spikes, much of it coming from people exiting high-tax California.
Before deciding to relocate, review the overall tax picture where you’re thinking about moving including property and sales taxes, and consider how states that have an income tax treat different forms of retirement income.
Seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — have no income tax. Two states, New Hampshire and Tennessee, tax only dividends and interest. However, Tennessee will soon become the 8th income tax free state when the Hall Tax, the tax on dividends and interest, phases out December 31, 2020. But be aware, states that don’t tax income often make up the revenue shortfall with higher property and sales taxes.
Most states with an income tax offer some type of retirement income exclusion, whether exempting entire categories of income, such as pensions, or excluding a set amount of income each year. You can find details on this Kiplinger retiree tax map.
Although the federal government taxes up to 85% of Social Security benefits, the majority of states exclude Social Security from state income taxes. Only 13 states tax some or all Social Security benefits including: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
For retirees, where they live and how much they pay in overall taxes could have a significant impact on retirement lifestyle. Doing some research will help decide if you want to stay with the club you’ve been playing for or if it’s time to look for a new franchise.