When it comes to finding ways to cut your tax bill in retirement, your federal taxes deserve a lot of attention. For high earners, the top marginal rate is 39.6 percent, and that can go to 43.4 percent when you add the Affordable Care Act surtax of 3.8 percent on investment income.
But don't overlook state income taxes, which vary greatly from state to state. California leads the way with a top marginal rate of 13.3 percent. On the other end, seven states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Tennessee and New Hampshire can also be considered as no-income-tax states because they tax individuals only on dividends and interest they earn. New Hampshire levies its tax when that income exceeds $2,400 for individuals and $4,800 for couples. Tennessee is gradually reducing its 5 percent tax rate on dividends and interest and plans to get it to zero by 2022.
Some states do tax the income you earn from working, but not income you receive from Social Security, government pensions or distributions from retirement plans and IRAs. If you're planning to retire, and moving to another state is a possibility, it's worth considering a state that lets you keep more of your income by paying less tax on it.
While 41 states impose a tax on all income, 36 take it easier on retirees versus those who still collect a paycheck from working. For retirees who get most of their income from Social Security, pensions and IRA distributions, it can help to consider moving to a state that taxes retirement income at a lower rate.
Washington, D.C., and 28 states don't tax any Social Security income: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.
Ten states don't tax any income you get from government pension plans: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania. Eight of them offer a broad exemption of all or some income from private sector pensions and IRAs. Only two -- Kansas and Massachusetts -- don't exclude any income from private sector pensions and IRAs.
In deciding whether to make a move, know that each state has its own requirements about what makes someone a resident of it. But they also share some common rules. The main requirement is to establish a domicile where you intend to remain indefinitely. Typically, a state will claim you as its resident once you stay there for at least 183 days in a year.
Some states, such as Oregon, have a 200-day requirement. But you don't need to be in a state for 183 days before establishing residency for tax purposes. Residency is established in a new state as soon as a new domicile is established and you've met other requirements, such as obtaining a driver's license, registering to vote, getting a library card or joining a place of worship or a club.
Also be aware that some states with low or zero income tax rates compensate by getting revenue from other sources. Some states have higher property tax rates (New Hampshire and Texas), some charge higher sales taxes (Tennessee) and others (Washington) charge higher taxes on gasoline and other fuels.
Be sure to consider these and other factors through the lens of your specific situation and circumstances.