State of Awareness

State of Awareness

WHERE you retire may be as important as WHEN

We feel it is paramount that each family firmly understands the ramifications of living in their current state, particularly through retirement. Although your neighbors might be wonderful, the local taverns quaint and cozy, the coaches of the soccer teams not only patient, but incredibly talented, the museums interesting, the roads and bridges well-built and efficient, and the parks full of splendor………this and much much more IS NOT FREE. It comes at a price, and in some instances at a hefty price. As prudent and responsible investors, it is time to truly understand all layers of the cost of our state and then use this newly found “State of Awareness” to drive our behavior.

Below are some key takeaways that we’d encourage each of you to consider when you determine how much you “love your state”.

We’ve talked to many clients living in Illinois and other high-tax states, and have heard or discussed the merits of moving and declaring residency in various other states based on a combination of nicer weather and a more efficient and desirous tax structure. Based on these discussions, we’ve prepared a summary of 12 states (including Illinois) showing the various applications of state income tax, Social Security tax, pension income tax, 401k and IRA taxation, estate taxes and property taxes. This information was compiled from the Kiplinger State By State comparison. These numbers have been simplified for illustration purposes and don’t include various small dollar exemptions/exclusions, however, are materially correct for most high net worth families. To gain further insight or exact specifics, please refer to the Kiplinger website. Below are some key takeaways that we’d encourage each of you to consider when you determine how much you “love your state”.

Taxes on Retirees

1: First $4 million exempt, then approximately 16% on amounts in excess
2: First $20,000 exempt
3: $35,000 to $65,000 exempt based on marital status
4: $15,000 to $30,000 exempt based on marital status
Source: Kiplinger State-by-State Guide to Taxes on Retirees
This information provided has been simplified for illustration purposes and is not complete. It has been obtained from sources believed to be reliable but is not guaranteed. Please reference the source material for additional information.


Dashboard's Key Takaways

Recent Federal Tax Changes

Up until 2018, the federal government basically subsidized high-tax states by allowing individuals to claim ALL of their state and property tax as a deduction from federal tax and effectively pay less federal tax since they’ve “already paid a bunch of state tax”. That changed in 2018 when the maximum deduction allowed for ALL state, local and property tax was capped at $10,000. What this did was shine a light on the high state and property tax burden of numerous states. As these taxes are now capped, it’s even more imperative that each family truly understands the “state of their state”.

State Income Tax

When all else goes wrong…… “Move to Florida”. That’s been a constant theme for many of our Illinois clients after the increased state tax bill was passed. As this chart shows, there are many states with truly a ZERO state tax, but there are various other retirement destination states that still have state income tax. It’s key to understand what your income looks like today, as well as what it will look like in retirement and plan accordingly.

Retirement Income

Retirement income is often lumped together, but we’ve broken down various types including Social Security Income, Pension Income (believe it or not, these are often then broken down into public versus private pensions), and then Income from the withdrawal of IRA’s and 401k’s. As such, we’ll touch on each of these types of income separately.

Social Security

The vast majority of all states included in this analysis do NOT tax Social Security in any manner. The only exception to that was Colorado which applied their basic state tax only to amounts in excess of $20,000. However, don’t forget that up to 85% of your Social Security can still be taxed at the federal level based on your income.

Pension Income

Pension Income refers to either public or private pension plans that pay monthly/annual amounts to retirees. Believe it or not, various states actually differentiate between public and private pensions, and in some cases only tax private pensions but not public pensions (seems like this is a bit of a double-standard…). If your family has Pension Income, be sure to check your state specifics on the Kiplinger State By State map. Be aware that for those states that tax Pension Income, this is yet another drain on your retirement resources.

IRA/401k Distributions

This is a critical part of many families’ retirement income/cashflow planning. We often see investors with more than 50% of their overall portfolio invested in tax-deferred vehicles (401k’s/IRA’s). As such, we feel it is critical that families consider what state they will live in during retirement, and know, with absolute certainty, the current tax ramifications of distributions from these plans. Many of our clients retire to Arizona or to South Carolina as these states may have favorable estate tax laws, but these states DO TAX IRA/401k distributions. If you currently live in a high state tax state, but there is no tax on IRA/401k distributions (LIKE ILLINOIS CURRENTLY), consider taking distributions from these plans BEFORE moving to a state that has a lower estate or income tax, but does tax these types of distributions!

Estate Taxes

Estate taxes (aka Inheritance Tax or Death Tax) is paid after the death of a high net worth individual. The federal government allows individuals to pass on up to $11,580,000 in 2020 ($23,160,000 for married couples in 2020) without any federal estate tax. However, there are numerous states (Illinois included) that also apply their own Estate Tax at the state level. Additionally, certain states (including Illinois) do not allow for a common “portability” election for married couples that haven’t taken the time to properly “own” assets in both names if their net worth is in excess of the state estate tax limits. Accordingly, we feel it is critical that each family take a good hard look at their current states estate taxes and determine if they want to leave a sizeable part of their estate to the legislators and bureaucracy of their current state, or to their families or intended charities.

Property Taxes

Property taxes are often a largely overlooked portion of one’s true living costs. For those of you that have been clients or friends of Dashboard for a while, you’ve heard us utter this phrase: “A free house ISN’T Free!” Depending on your state of residence, a wonderfully appointed million-dollar home may cost upwards of $25,000 per year to simply keep the state property tax collectors at bay – that’s about as much as you can count on from your entire Social Security benefit. Don’t overlook property tax burdens! Also, remember that with new federal tax laws, the deductibility of these taxes is capped, all but eliminating any federal tax benefit as well.

Capital Gains

For pretty much as long as federal taxes have been collected, there has been a distinctively different and lower federal tax rate assessed to investment capital gains versus ordinary income. However, that is NOT true for states that charge a state income tax. Whether it’s out of ease, inefficiency or simply because they can get away with it, these states do not discern between earned income or capital gains. They simply apply the same state tax rate to ALL state income. As such, if your portfolio contains a significant amount of capital gains, know that states with high state income taxes may create a drain on your after-tax return.

What Could Go Wrong?

The famous last words……“What could go wrong?” Well, before we simply put our homes on the market, or possibly buy the small $150,000 home in Florida and change residency, there’s a lot to think through. States are getting very focused on residency changes and aggressively challenging taxpayers. Also, as we all know, things can and will change. While we’re not advocating for a mass movement to Florida, and we’re not secretly being paid by the Tennessee Bureau of Tourism, each family owes it to themselves to critically analyze their true cost of residing in their current state. If, after this analysis, you’re living right where you belong…Great! Take your neighbors out to a nice dinner, visit your library and check out a bunch of books, volunteer to teach Junior Achievement at your local junior high, and make sure to file timely state tax payments!


While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.