Source: sxc.hu Photo: ctoocheck

Source: sxc.hu Photo: ctoocheck

One of the things that can eat into your retirement funds is taxes. No matter where you live in the U.S., you will have to pay federal taxes. However, state income and sales taxes are a completely different matter. These taxes vary according to where you live, and can make a big difference how much money you have to use at your disposal during retirement. Kiplinger offers a really great interactive map that offers insight into states where the tax situation can make retirement more desirable. Here are some of the results:

No income taxes

If you want to avoid income taxes altogether, you can try moving to Washington, Nevada, Alaska, Texas, South Dakota, Wyoming or Florida. It is also worth noting that New Hampshire and Tennessee only tax interest and dividends, so other income is safe. These states can provide you with a way to avoid paying state taxes on your hard-earned income. Watch out, though: Only New Hampshire and Alaska have no sales tax to go with their lack of income tax. Tennessee has one of the highest sales tax rates in the country, and that could offset — to a small extent — the fact that only interest and dividends are taxed.

Real estate taxes

In addition to paying income and sales taxes, if you buy a home to live in during retirement, you will have to pay real estate taxes. According to Kiplinger, none of the states with low income taxes and sales taxes have the lowest property taxes. Probably because they make up for their lack of income tax with charging higher real estate taxes. New Hampshire, in spite of having low income taxes, actually has some of the highest median property taxes. The states with the lowest property taxes are Arkansas, Louisiana, West Virginia, Alabama and Mississippi.

Other tax considerations for retirement

Part of arranging for a prosperous retirement is understanding what sort of tax situation you want to be in. If you are planning to move somewhere for your retirement years, then it is a good idea to understand the tax implications. Looking at a combination of income, sales and property taxes is a good start. But you should also consider your pension and your Social Security benefits. Several states treat public and private pensions differently, and some will even tax public pensions. A number of states tax Social Security benefits, meaning that each time you receive Social Security income, you are taxed on it, so be sure to check the 2012 social security tax limit. Interestingly, Pennsylvania and Mississippi won’t tax any of your retirement distributions — even if they come from your 401k or IRA.

It can be a bit of a headache, but figuring out the best situation for you should include taxes. Living in a state with low property taxes does you no good if you don’t want to buy a home. For those who like to travel, setting up a residence in a state with low income taxes and relative low sales tax, but renting and not worrying about property taxes, might be a wise decision. For those who want to stay at home, and buy a cozy house, living in a state with high property taxes might be disastrous, even if low income taxes were part of the equation.

In the end, you need to decide what you want, and what sort of tax situation might be best for you. A financial planner or tax professional could help you determine where you would best flourish, as well as provide you with guidance related to retirement tax planning. Just because you’re retired from work, it doesn’t mean that you are retired from paying taxes.