Retirees Be Warned: The Cost Of Moving To A Low-Tax State Might Surprise You

If you're retired, the idea of relocating to a state with minimal or no income tax may be tempting. With today's high home prices and rising cost of living, it might seem like an easy way to save a few bucks. Even so, it's a move you'd better think through, as there are some variables in play that could make a supposedly low-tax state less affordable than you think. While avoiding state income taxes and embracing important tax breaks could cut down your expenses, states with low or no income tax often increase other taxes to compensate, which could cost you just as much or more in the end.

Fed up with high taxes, many Americans have been flocking to no- or low-income tax states. Between April 2020 and June 2023, Florida and Texas — both of which have no state income tax – took in the highest number of new residents from other states, according to The Heritage Foundation. Much of the migration came from high-tax states such as California, New York, Illinois, and New Jersey. While the lack of income tax was certainly a welcome change for the newcomers, the real question is whether their overall expenses actually went down. In many cases, they may not have. "Lower tax states will usually try to offset the lack of a state income tax in several ways. Real estate taxes, sales taxes, personal property taxes (cars, boats, etc.) along with generally higher levels of licensing and other official fees are commonly higher," Rick Miller, financial planner and investment advisor at Miller Investment Management, tells Investopedia.

Neither New Hampshire nor Texas charges income tax, but both are states with some of the highest property taxes in the country. According to data from the Tax Foundation, the effective property tax in New Hampshire in 2023 was 1.41%, the sixth-highest rate of any state. Texas was right behind it, with an effective property tax rate of 1.36%. Meanwhile, fellow no-income-tax states Tennessee and Nevada make up for it by charging some of the highest sales tax. Per the Tax Foundation, Tennessee is in second place with a state sales tax of 7%, while Nevada is in seventh with a rate of 6.85%.

Homeowners insurance, though not a tax, is another cost that can erode the savings you may reap from living in a no-tax state. While one state that's considered tax friendly for retirees is Florida, as it won't tax your social security benefits, it has some of the highest homeowners' insurance in the country. According to Bankrate, an average policy for $300,000 of dwelling coverage in Florida costs more than $5,600 – more than twice the national average. If you're retired and considering making a move to save on your taxes, it's important to thoroughly research your destination so there are no surprises down the line. Even if you're not looking to purchase a home, checking with a realtor for information on taxes could be in your best interest.