June, 2010
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

In the February and March Financial Concepts we covered estate tax laws and trust document wording. In this, the last article of the estate tax series, there are a couple more ideas to discuss.

This May Congress started again discussing a new estate tax law. We hoped the law would have changed by now, but that has not happened, and many issues remain in the balance. For instance, “Step up in basis” may be part of the new law and it may not. Keeping track of your cost basis in all of your assets is very important, and we constantly update the basis for all of our clients. If we are allowed, in the new estate tax law, to keep the “step up in basis,” then capital gains will not be a big problem when someone dies. If the “step up in basis” is not allowed in the future, we will need to be concerned about capital gains taxes in everyone’s estate planning decisions.

Not only is the federal estate tax law going to be changing in the future but most of the individual states have been changing their inheritance or estate tax laws also. Some states have taxes that are much higher than others and retirees should think about the overall taxes when they pick a new state in which to retire. Outlined below are some ideas to consider if you are thinking about moving to a new state to enjoy your retirement years:

State Income Taxes

The following nine states do not have taxes for personal income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. However New Hampshire and Tennessee do tax investment income, which is an important consideration for retirees looking for a place to live. Also, Georgia provides a $70,000 exclusion for couples that are 62 years of age or older.

Social Security Benefits

There are 26 states that exclude social security payments from being taxed. States such as Colorado, Connecticut, Kansas, Minnesota, Montana, Vermont, West Virginia and a few others tax some or all of the social security payments that retirees receive.

Pension and Retirement Income

Illinois and Mississippi do not tax distributions from qualified pensions and individual retirement accounts and Alabama does not tax income from defined benefit plans. However, Louisiana, Michigan and New York do put a cap on the private sector retirement income exclusion at different levels.

State and Municipal Sales Taxes

Most states and many of the larger cities have a sales tax to give them more income to cover their expenses. The idea of sales tax varies greatly between states.

Prescription drugs are exempt from sales taxes in most states, plus some states like Pennsylvania do not tax food or clothing. Some retirees in the New England area like to move to Vermont for its scenery and travel to New Hampshire for shopping because there is no sales tax in that state.

Property Taxes

Property taxes are imposed by cities, townships, counties, school districts, and other jurisdictions in a state, and this is usually their biggest source of revenue.

Many states give residents a break on their property taxes based on age or income level. Also, many local governments provide for a homestead exemption especially for seniors.

The lowest property taxes are offered by Alabama, Arkansas, Kentucky, New Mexico and Oklahoma. The lower property taxes makes these states very appealing to retirees who are thinking about purchasing a new home.

Inheritance and Estate Taxes

Inheritance tax is a state tax assessment made on the portion of an estate received by an individual.

It has been estimated that over the next 40 years approximately $53 trillion of assets will transfer to the younger generation through the estate and probate process. Prior to 2002 most states received a portion of the federal estate taxes paid when someone died. However, a new law was passed in 2002 that phased out the individual states receiving any of the federal estate tax from the federal government. Over the last two to three years many states have written new laws so they can once again receive some inheritance or estate tax when someone in their state dies. There are many different variations to the laws that have been passed by the 50 different states. The following states still impose an inheritance tax: Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. Arizona eliminated estate tax for individuals dying after January 2006, and Massachusetts limits estate taxes on estates valued at $1 million or more. Reviewing the inheritance and estate tax laws for the state in which you plan to purchase a lot of property during retirement is a good idea.


When you take a hard look at inheritance taxes, sales taxes, real estate taxes and other taxes it’s interesting to find out how much states vary on tax burdens.

The states with the highest total tax burden as a percentage of income are Maine, New York, Ohio, Rhode Island, Vermont and the District of Columbia. The states with the lowest tax burden as a percentage of income are Alabama, Alaska, Delaware, New Hampshire and Tennessee.

When you are thinking about what state to retire in it’s important to consider several ideas. For example, will you own a lot of real estate or not? Is the bulk of your income from an individual retirement account or pension or is most of your income coming from dividends, interest, and capital gains?

A few states have specifically tried to cater to retirees. They recognize the positive impact of wealth controlled by the retirees. Since the year 2000 Georgia, Idaho, New Mexico, North Dakota and Utah have reduced their overall tax burdens while Arkansas, Indiana and New Jersey have increased theirs. Before you pick a new state to live in during retirement, let’s consider all of these options.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .