Does it make sense to retire in a state with no state income tax?

Question

TL/DR: Is it worth retiring (fully residing or snowbirding for a substantial part of the year for tax reasons) in a state with no income tax? What are some factors to consider? Is there a net financial benefit?

I am starting to plan for retirement and one fundamental question is where to retire. I work in a state with an income tax, but am wondering if it would make sense to retire in a state with no income tax. Obviously this is a major decision.

I know a retired couple who have lived, and now 'snowbird' to FL for winter, but also have a residence up North. My guess is they are not just running from shoveling the driveway but are also doing this for tax reasons, possibly staying in FL longer than their home up North in order to claim it as their primary residence for tax reasons.

However, I am wondering whether all this is worth the hassle and whether it actually matters whether your primary residence is in a state with or without a state income tax. Or whether the expense of snowbirding (maintaining two properties -- assume no rental income from either) is worth the savings.

I understand the exact answer would depend on actual numbers but am looking for advice on whether generally this seems like a good retirement plan. What are some advantages and disadvantages of technically 'moving' (or snowbirding for an extended enough period to consider it primary residence) to a state with no income tax upon retirement? Lifestyle wise, are there other ways they 'get you' in such states?

I have found some online articles on the topic but none that seem authoritative or comprehensive enough to really dive into the topic. Any recommendations on good resources would be appreciated.

Answer 1

I would be more worried about sales tax than income tax. As a retiree, you spend your savings. Income tax is usually less of a problem, as you have less income than while working.

If you do pick a state with no income tax, consider living on the border of a state with no sales tax. Low income tax usually means high sales tax. For example, Washington has no income tax and a 9% sales tax. But if you live in Vancouver, WA, you can shop in Oregon which has no sales tax.

Wyoming has no income tax. Montana has no sales tax.

New Hampshire has no income tax and no sales tax.

Alaska has no income tax and no state sales tax, but municipalities can charge sales tax. Average sales tax is 1.69% but can be as much as 7%. Cost of living is high in Alaska as well.

Florida has no income tax, but it has a 6% sales tax. Georgia has a 4% sales tax, which is a bit better.

Texas has no income tax, but it has a 6.25% sales tax. Oklahoma has a 4.5% sales tax.

There may be other pairings.

There may also be property tax implications. You'd have to work those out on your own. They are going to be very localized, different from county to county and municipality to municipality. Low tax areas may have other issues, like a lot of polluting industry. And don't forget to compare assessments as well as rates. A nominally low rate coupled with high property value assessments can lead to high taxes overall.

Answer 2

Say you are getting $80K/yr in otherwise taxable income during retirement. Moving from a 5% tax state to Florida will save you $4000/year.

Now, if you are wanting to avoid the winters and stay there four months a year, it's just an extra two months to get you Florida as your tax home. Other than this, there are so many variables, it's tough to answer this question. As the comments imply, it's safe to say there's no free lunch, there's a higher property tax in the no income tax states.