Retiring Your Tax Bill

Arden Dale for the Wall St. Journal writes: It's getting trickier to put up your feet and sidestep taxes at the same time.  Investors getting ready to retire have long looked at state and local tax laws in deciding where to settle when their working days are over, alongside sunny weather and recreational opportunities.

But some states are becoming tighter-fisted with tax breaks for retirement income. Georgia and Michigan have imposed new limits on deductions and exemptions, and Kentucky is considering similar changes.

"As the population ages, it's going to be harder and harder for some states to keep their generous programs," said Kim Rueben, a senior fellow at the Tax Policy Center, a joint venture of two Washington think tanks, the Urban Institute and the Brookings Institution.

Luring Retirees

Other states are hoping to lure retirees by exempting more income from taxation. Missouri has expanded its tax breaks, and Wisconsin has talked about doing the same, says Karen Conway, an economics professor at the University of New Hampshire who has written about retirees and migration.

The result is a shifting landscape that is complicating what is already a difficult calculation of the financial impact of uprooting to another state.

Some states, including Florida and Texas, don't tax any personal income, including retirement income. Pennsylvania doesn't tax any retirement income, while Illinois doesn't tax most retirement income. Other states appeal to tax-conscious retirees because they have low property taxes or don't have a sales tax.

"Every state has a slightly different nuance and understanding the tax regime is even hard for financial advisers," says Ken Weingarten, a financial adviser in Lawrenceville, N.J., who manages around $35 million.

Wrestling With Taxes

The changes could also alter the debate in other states, particularly those wrestling with the issue of whether increasing taxes will compel residents to leave.

William Schooling, a demographer at the California Department of Finance, says there is limited information about whether people move based on tax concerns. But a New Jersey report linked tax rates to "small but significant effects on net out-migration from a state."

Financial advisers often discuss tax regimes with clients who are getting ready to retire. Andrew Tignanelli, president of the Financial Consulate, an advisory firm in Hunt Valley, Md., is working with a New Jersey doctor who plans to retire to Hershey, Pa., because taxes are lower there and family members also live in Pennsylvania.

Mr. Tignanelli, whose firm manages around $275 million, tells clients in Maryland to consider neighboring Delaware as well as more distant Tennessee. Delaware exempts a portion of retirement income and has no sales tax, while Tennessee taxes only dividends and interest, he says.

On the West Coast, retirees are sometimes drawn to Nevada partly because it has no income tax, says Christopher Jones, who runs Sparrow Wealth Management in Las Vegas. Mr. Jones has personal experience—he moved the firm from the East Coast two years ago, partly to be close to family and partly to save money. "I was getting killed on New York City taxes," he says.