1. State taxes on benefits from retirement plans

Seven states don’t tax individual income at all and therefore don’t tax retirement income either…

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

Two states only tax income from dividends and interest: New Hampshire and Tennessee. So while retirees in these states won’t have to pay taxes on Social Security or pension benefits, they will still owe some taxes to the state if they own dividend-paying stocks or bonds, for example.

n the other 41 states and in Washington, D.C., taxes on Social Security and pension benefits vary. Some states exempt pension benefits or Social Security benefits while other states tax both. For details, check out CCH’s state-by-state breakdown of taxes on pension and Social Security benefits.

2. State income taxes

There are 41 states that tax income, and if you live or plan to retire in one of them, how much of your retirement benefits you could owe depends on that state’s tax rate.

Some states have a relatively low income tax rate across all brackets. The rate for even the highest tax bracket in Arizona, New Mexico, and North Dakota, for example, is less than 5 percent. Some states – for example, Indiana (3.4 percent) and Pennsylvania (3.07 percent) – have a relatively low flat tax rate.

But in other states, income tax is a double whammy: Not only is the tax rate for the highest bracket relatively high, the bar to qualify for the highest bracket is low. In Arkansas, for example, any filer earning $33,200/year pays the highest bracket’s rate of 7 percent. In Maine, couples earning $40,700 and single filers earning $20,350 pay the highest bracket’s rate of 8.5 percent.

For more details on your state or the one you’d like to retire in, check out the state-by-state income tax breakdowns from CCH and the Federation of Tax Administrators.

3. Sales tax

Five states don’t have a sales tax, according to the FTA: Alaska, Delaware, Montana, New Hampshire, and Oregon.

In the other 45 states, the rate varies from 2.9 percent (Colorado) to 7.25 percent (California) – and that’s after California lowered its rate from 8.25 last year.

What types of goods sales tax applies to also varies from state to state. In Hawaii and New Mexico, for example, doctor services are taxed. In South Dakota, accountant and attorney services are taxed. Other goods and services taxed in some states but not others include barber services, landscaping, prescriptions, clothing, and food.

For details, check out the FTA‘s state-by-state breakdown of sales tax rates, which also lists which states exempt food, prescriptions, and over-the-counter meds.

4. State and local property taxes

Because property taxes can be significant, CCH suggests learning not only an area’s current property tax rate, but also the history of how it has changed over time.

To learn more about a state or county, try this search engine formula: [state/county] + state/county property tax. That should lead you to the applicable revenue department’s website. Here’s Florida, for example.

While reading up on a state’s property tax rates, don’t forget to check for tax breaks too. Some states and local jurisdictions offer some form of property tax exemption, credit, abatement, deferral, refund, or other benefit to senior homeowners or renters.

5. State estate tax

Wealthier retirees must also consider the estate tax of the state they’d like to retire in. If that state does tax estates, find out both the tax rate and what size estate the tax applies to.

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From the Social Security website:

You can work while you receive Social Security retirement (or survivors) benefits. When you do, it could mean a higher benefit for you in the future. Higher benefits can be important to you later in life and increase the future benefit amounts your family and your survivors could receive.

While you are working, your earnings will reduce your benefit amount only until you reach your full retirement age. After you reach full retirement age we recalculate your benefit amount to leave out the months when we reduced or withheld benefits due to your excess earnings.

We use a formula to determine how much your benefit must be reduced:

• If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.For 2012, that limit is $14,640.
• In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit, but we only count earnings before the month you reach your full retirement age.If you will reach full retirement age in 2012, the limit on your earnings for the months before full retirement age is $38,880.
  (If you were born in 1946 or 1947, your full retirement age is 66 years.)
• Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings.Caution: If you apply for benefits more than 6 months after you reach full retirement age, we can only pay the benefits for the previous 6 months.

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If your parent (or someone else) can claim you as a dependent, use this guide to see if you must file a return.
In this guide, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment
compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Earned income
includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Gross income is the total of your unearned
and earned income.
Single dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
· Your unearned income was over $950.
· Your earned income was over $5,800.
· Your gross income was more than the larger of—
· $950, or
· Your earned income (up to $5,500) plus $300.
Yes. You must file a return if any of the following apply.
· Your unearned income was over $2,400 ($3,850 if 65 or older and blind).
· Your earned income was over $7,250 ($8,700 if 65 or older and blind).
· Your gross income was more than the larger of—
· $2,400 ($3,850 if 65 or older and blind), or
· Your earned income (up to $5,500) plus $1,750 ($3,200 if 65 or older and blind).
Married dependents. Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
· Your unearned income was over $950.
· Your earned income was over $5,800.
· Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
· Your gross income was more than the larger of—
· $950, or
· Your earned income (up to $5,500) plus $300.
Yes. You must file a return if any of the following apply.
· Your unearned income was over $2,100 ($3,250 if 65 or older and blind).
· Your earned income was over $6,950 ($8,100 if 65 or older and blind).
· Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
· Your gross income was more than the larger of—
· $2,100 ($3,250 if 65 or older and blind), or
· Your earned income (up to $5,500) plus $1,450 ($2,600 if 65 or older and blind).

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Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

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