When you are planning for retirement, you may consider moving to another state for one reason or another. If you are making this decision, you should certainly take taxation into consideration, and there are some potentially significant taxes that you may overlook.
State Income Taxes on Retirement Income
In most states, you have to pay state-level income taxes on pension payments and 401(k) and individual retirement account income. However, there are nine states that do not have state-level income taxes at all so there would be no tax to pay.
These states are Texas, Nevada, Florida, New Hampshire, South Dakota, Wyoming, Tennessee, Alaska, and Washington. There are state-level income taxes in Illinois and Pennsylvania, but they do not apply to pensions and retirement accounts.
People in Alabama and Mississippi pay taxes on 401(k) and individual retirement account income, but pension income is not taxable.
If you are going to move to a state that imposes an income tax on retirement income, you should consider the rate because there can be huge differences. For example, in California, the top marginal rate is 13.3 percent, but it is 3.07 percent in Pennsylvania.
There are relatively low rates in Kentucky and North Carolina at 5 percent and 5.25 percent respectively.
State-Level Estate Taxes
We have a federal estate tax that can be a factor for high-net-worth individuals in every state. It is only a factor for multimillionaires because there is currently an $11.7 million exclusion (though there are proposals in Congress to cut that in half). You can transfer this much tax-free before the estate tax would be levied on the remainder.
The rate of the tax is 40 percent so it can have a major impact on people that are exposed. You cannot give large gifts to avoid the estate tax because there is also a gift tax that is unified with the estate tax.
This $11.7 million exclusion that applies to lifetime gifts and your estate will remain intact indexed for inflation through 2025 if the law is not changed, but in 2026, it is scheduled to go down to $5.49 million.
In addition to the federal estate tax, there are state-level estate taxes in a total of 12 states at the present time. We do not have estate taxes in Kentucky and North Carolina, but if you own property in another state that has an estate tax, it would apply to your estate.
These are the states that have state-level estate taxes:
- Massachusetts
- New York
- Connecticut
- Vermont
- Maryland
- Illinois
- Hawaii
- Maine
- Minnesota
- Rhode Island
- Oregon
- Washington
Of course, the property’s value would have to exceed the exclusion in the state that it is located in. The state-level exclusions are lower than the federal exclusion, and the lowest exclusion is $1 million in Oregon and Massachusetts.
Inheritance Taxes
An inheritance tax is not the same as an estate tax. This type of tax can be levied on individual distributions to each person who is receiving an inheritance that is not exempt.
There is no federal inheritance tax, but there are five states that have inheritance taxes. Kentucky is one of them, but Class A beneficiaries are exempt. These are a surviving spouse, children, parents, grandchildren, siblings, and half-brothers and half-sisters.
Schedule a Consultation Today!
If you would like to work with a Charlotte, NC estate planning lawyer or Huntersville, NC estate planning lawyer to develop a plan for aging that leads to effectively passing on your legacy, we are here to help. You can give us a call at 704-944-3245 to schedule a consultation appointment.
Our Ashland, Kentucky location can be reached at 606-324-5516, and our Florence, Kentucky location can be reached at 859-372-6655. You can also use our contact form if you would prefer to send us a message
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