Nobody wants to pay more taxes than they need to – especially when getting closer to retirement. Most tax planning strategies have a lot to do with where you live, work, and ultimately die.
Lineman State Taxes
Let’s say you work as a utility lineman for 30 years in the state of New Jersey. According to author Tina Orem’s Nerd Wallet article titled “2023-2024 State Income Tax Rates and How They Work” published in May 2024, you will pay $10.75 of every $100 earned in state taxes. But if you do the same utility lineman job in Nevada, you will pay $0 of $100 earned.
In fact, there are multiple states who charge 0% state income tax on earnings. Making more in a high state tax may mean making less when you account for taxes. If you make $3 million in lifetime earnings, this could equate to over $300,000 in state taxes working in New Jersey vs. $0 living and working in Nevada.
Retirement Distributions for Linemen
Just like state income tax on earnings, retirement distributions vary significantly from state to state. Your retirement distributions are normally driven by where you call home. Pennsylvania, Illinois and Iowa (among others) tax retirement distributions at 0%. If you have a 401k with $1 million dollars and take distributions over your lifetime while living in those states you will pay $0 in tax. Seems pretty good to retire in those states!
What about Social Security? Social Security for most people is their primary source of income during retirement. A whopping 39 states give us a pass on state income tax for Social Security benefits. Not a big worry for avoiding state taxes.
Taxes Are Inevitable – Even in Death
So what happens if you die with retirement assets and you don’t use them up? You can guess it. It’s where you live and each state treats this differently. Use Pennsylvania as an example, as we learned above they don’t tax your retirement distributions, but they do tax what is left. This is called inheritance tax and depending on who your heirs are, the estate will have to pay a different tax rate. This tax rate changes from 4.5% to 15%. That’s a big difference.
Location, Location, Location
Taxes really matter on where we live, work and die and we need to evaluate that with financial planning to avoid mistakes. Want to learn more? [Schedule a conversation.]
