According to Kiplinger's magazine, Minnesota is ranked FIRST...as the least tax friendly state for retirees. Unfortunately, first is not a good thing in this case! To be clear, when we are talking tax, we aren't limiting this to income tax. Retiree tax friendly considerations include: Income tax, sales tax, inheritance tax and property tax.
As those who live here know, taxes can be quite steep, even prior to retirement. Individual state income taxes start at 5.35% and rather quickly move up to 9.85%. Average state and local sales taxes are 7.27% (although, food, clothing, and prescription and nonprescription drugs are exempt from state sales tax). Social Security income is currently taxed in Minnesota—one of 13 states who tax this. Recent state tax legislation exempts a portion of Social Security income (Kiplinger's did not pick this up).
Other income that Minnesota taxes, that many states don't, includes: Pensions, distributions from individual retirement accounts and 401(k) plans. And, topping it off, Minnesota is one of 14 states with an estate tax (6 states have inheritance taxes). Property taxes are high but compared to our neighbors to the east (Wisconsin), not too bad, especially when considering state property tax refunds based on income.
Just for the record, rounding out the top 10 least tax friendly states for retirees on Kiplinger list: Connecticut, Kansas, Vermont, Nebraska, New Mexico, Utah, Maryland, Indiana, and drumroll please..., Wisconsin. So, if you are looking to make a short move east across the border to ease the tax burden, think again.
But wait, before you reserve your U-Haul trailer to push off to a more friendly tax state, consider a few things. Don't let the "tax tail wag the dog." The choice to live in one state versus another, especially in retirement years, has a lot to do with other factors. Factors beyond tax that rank pretty high include: Healthcare availability, cost of living, climate, social interaction and basic quality of life. Again, remember that the rankings are in regard to taxation for retirees, specifically tax factors for retirement income (pensions, Social Security, retirement account distributions, etc.) And folks who just look at income taxes may be surprised when they see a very steep property tax bill or find that food and day-to-day spending jumps due to high sales taxes (see below for a sample list of "taxes").
As many of you look toward retirement, you may be looking at places you may want to snowbird to or permanently move. In a future blog, we will look at states that may be a bit more appealing, from a tax standpoint. The top choice may surprise you.
We are curious to hear your thoughts on what you think is appealing when considering relocating, snowbirding, or just getting away for an extended stay.
Taxes that are state (or local jurisdiction) specific may include:
Local Add-On Sales Tax
Luxury Tax (interesting note - MN taxes more for champagne than other fermented "wines")
Sin Tax (liquor and cigarettes)
Mansion tax (NY only, for homes in excess of $1 million)
Travel Tax (e.g. hotel / resort / airline ticket)