Here are 4 hidden state taxes that often shock US retirees — and none of them are the income tax. Is Florida really as tax-friendly as you think?

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming
• New Hampshire

But these states have to generate revenue from other sources to cover the expenses of essential services such as schools, roads, police departments and firefighters. To bridge the gap, these states have taxes that operate differently from other states which the average person may not be aware of.

And most of these taxes impact those who are retired or live on passive income. If you’re a retiree who either lives in one of these nine states or is planning to move there, here are the top four hidden taxes you should keep an eye on.

1. Higher average property taxes

One of the most common ways for states to offset their lack of income taxes is to simply tax property at a higher rate. Texas, for instance, is famous both for its lack of income tax as well as its high property tax. The Lone Star state charges an average effective property tax of 1.63% - far higher than the national average of 0.9%, according to SmartAsset [2].

The state’s property taxes are the sixth-highest in the country, according to National Mortgage Professional [3]. Similarly, New Hampshire has the fourth-highest average property tax rate in the country at 1.89%, according to SmartAsset [4].

For retirees in these states, higher monthly tax bills could offset some of the benefits of not having state income taxes.

2. Sales tax

Sales taxes are the most common form of state-level revenue collection and are one of the primary ways that states with no income taxes can offset their lack of revenue from your paychecks.

Florida — a state that hasn’t charged income taxes in 100 years — generates 80% of the state government’s revenue from sales and excise taxes alone, according to a report by the Institute on Taxation and Economic Policy’s (ITEP) [5].

Only five states do not have statewide sales taxes:

• New Hampshire
• Oregon
• Montana
• Alaska
• Delaware

But even in these states without a general statewide sales tax, residents and visitors often face alternative taxes: local sales taxes, gross receipts taxes or targeted levies on specific goods and services.

This is a concern for most retirees who rely on a fixed income, but it is particularly concerning for retirees with a low income. Sales taxes are regressive, which means lower income households bear a larger burden because of it, according to the ITEP.

If your retirement income is relatively modest, speak to an expert to see if moving to a state with income taxes above a certain threshold and lower sales taxes could actually save you money.

3. Estate taxes

For many retirees, the focus isn’t just on sustaining your assets to meet monthly living expenses but also on ensuring there is something left to pass on to the next generation. A solid estate plan can make the difference between preserving your wealth and watching it get diminished by taxes.

However, your efforts to preserve your legacy might be complicated by estate taxes. Twelve states and the District of Columbia impose additional estate taxes on top of the federal estate tax, according to the Tax Foundation [6].

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington
• Washington, D.C.

For retirees without an estate plan, these taxes may come as an unwelcome surprise. In fact, your loved ones may be the ones left with sticker shock after you pass away. Make sure you talk to a professional estate planner to ensure that your finances can be passed on without becoming a burden.

4. Inheritance tax

Unlike an estate tax, which applies to the estate before the assets are distributed to heirs, an inheritance tax is charged on an individual level to the heir directly. Five states levy an inheritance tax:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

The state of Maryland is the only jurisdiction that applies both estate and inheritance charges, according to the Tax Foundation [7].

This hidden tax could be a hefty burden for your loved ones after you pass. However, there are various exemptions and limits on this tax in each state, and retirees can also use sophisticated maneuvers like gifting and setting up trusts to minimize the costs. If you live in a state with this rare tax, speak to a financial expert to see if you can mitigate the expense.

Whether you live in a state with no income tax or one that imposes estate, inheritance, sales, or property taxes, the truth is the same: there’s no escaping taxes entirely in retirement. What matters is understanding the rules where you live and planning accordingly.

Working with a financial planner can help you spot hidden tax traps, protect your retirement income, and ensure that your legacy is passed on the way you intend.

Article sources

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[1]. TurboTax. "9 States with No Income Tax"