"The state has no income tax. That's where I'm moving." I wish had a dollar for each time I heard this. I would already be retired.

It seems that when people get to thinking about retirement, they invariably look at those states that have no income tax or where retirement income is not taxed. I'm a Pennsylvanian by birth and education, and I always knew that my state is one of the best to live because of its tax treatment of retirement income. In fact, Social Security benefits, IRA distributions, public and private pensions are all exempt from Pennsylvania state income tax. Sounds good, but be careful because if you look at the 50 state capitals, Harrisburg, Pennsylvania is one of the most taxing cities for retirees.

Huh? How is that possible? Because of high property taxes. Consider this. Take a house at $112,330. The property tax is $6,551 on that home along with a sales tax of $840, totaling $7,391. Compare that with, let's say, Dover, Delaware, where a $133,010 home price has a property tax of only $543 and no sales tax whatsoever.

Normally, you would think that the Keystone State, which is second only to good old Florida in the percentage of residents who are at least 65, would afford the seniors a bit more of a tax break. Well, it does. It offers a property-tax rebate of up to $500 to certain older homeowners but a couple with a $60,000 income doesn't qualify. No break there.

Most financial gurus feel that we place too much emphasis on which location has a state income tax when it is the property tax that drives the bus. One senior manager at a prominent bank says that while many states exclude some or even all of a pension from income taxes, it's the property tax that goes on and on and on. Of course, there is a caveat here. The Harrisburg and Dover citings above apply to taxes in state capital cities. Inasmuch as property taxes are local, they can differ widely from city to city within a state.

So, who are the retirement friendly capital cities? According to figures compiled by Kiplinger as well as information supplied by Sperling and CCH, Dover, Delaware heads the list as the best spot, tax-wise, for retirees. Next in line would be Juneau, Alaska followed by Frankfort, Kentucky and Columbia, South Carolina. In fact, for us northerners, Albany, New York (the state capital) is ranked number 5. Pretty good, eh?

And at the other end? Well, Harrisburg Pennsylvania is the worst place with Trenton, New Jersey (which motto has always been "Trenton Makes, the World Takes" that is probably twisted in the wrong order), and then Madison, Wisconsin. In fact, Annapolis, Maryland, in what is called the "Free State," has a five percent state sales tax on almost every purchase including some groceries with a property-tax bill of $3,483 based on a 100 percent assessment of the market value of a $275,000 house. No wonder it ranks 47 on the list.

So, the bottom line is to look at the property tax more than the state income tax.

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