When people are working, they might not realize how big an impact taxes will have on their retirement lifestyle. Taxes end up being among the most significant expenses seniors face.

Once you start tallying up the federal, state and local taxes, you can see you have to be aware of how to mitigate the impact. One way is to choose a place to retire that does not have onerous state and local taxes.

For example, nine states have no state income tax, according to the Federation of Tax Administrators. They are  Alaska, Texas, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming. (In New Hampshire and Tennessee, income tax is limited to dividends and interest income.)

According to the Tax Foundation, the states with the highest tax impact are Maine, New York, Ohio, Minnesota and Hawaii. The ones with the lowest are Alaska, New Hampshire, Delaware, Tennessee and Alabama. The foundation also says that Americans will pay more in taxes in 2010 than they will spend on food, clothing and shelter combined. Another factor to consider, if you have a large inheritance to leave, is whether the state has an estate tax.

If you move, the good news is the tax impact of selling your home is less these days. That’s because Congress changed the rules in 1997. According to the book The New Retirement, by Jan Cullinane and Cathy Fitzgerald, “Some or all of the gain on the sale is not taxable as long as the taxpayers owned the house as their principal residence for at least two years during the five-year period ending with the date of the sale. The amount of gain that is not taxable is limited to $250,000 for a single taxpayer (or a single taxpayer limited separately) and $500,000 for a married couple filing a joint return. Significantly, unlike under the old law, this gain is eliminated from taxable income and is not deferred to reduce the tax basis of any replacement residence.”

Cullinane and Fitzgerald also wrote that the sellers do not have to buy a replacement principal residence, so it especially benefits those wanting to downsize.

This entry was posted on Wednesday, June 2nd, 2010 at 11:02 am and is filed under Financial Planning. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.