Eliminate your state’s pesky income tax: Move

Years ago, when my salary was so low I didn’t worry about taxes, a wise, older friend advised me to start planning for retirement immediately and to complete it before by 60th birthday. That was important, he said.

Why?

Because at a certain age, he said, many men and some women become obsessed with not paying taxes. Turns out he was right. Many of us know people who moved when they retired to a state without income or sales taxes. In the Washington, D.C., metro area a lot of feds based in Maryland (a high tax state) move to Delaware which has some terrific beaches and no sales tax. A friend who retired from the General Services Administration years ago moved from Virginia to Washington state. He lives there because there is no personal income tax and shops across the river in Oregon have no sales tax. Is it extreme? Maybe, but he said it gave him a lot more spending money which was the point.

A large number of federal and postal workers live, work and pay high taxes in California, New York, Massachusetts and Maryland. Many of them feel that when they leave government they have to move to a low-or no-tax state to get more bang from their annuity bucks. That’s especially true for the majority of working feds who are under the Federal Employees Retirement System with its diet-cost of living adjustment.

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In times of high inflation (3% or greater) FERS retirees get a COLA that is one percentage point less than Civil Service Retirement System retirees. While that doesn’t seem like much in a period of little or no inflation such as now, it can drastically reduce the value of your monthly annuity in a retirement that could last 10, 20 or even 30 years. When they retire many feds move to states such as Florida, Nevada and Texas. And people do move and relocate because of taxes.

The lesson here: If legally avoiding taxes is your thing you can get very creative thanks to the variety of state tax rules, laws and loopholes. In addition to checking up on current state tax laws, it pays to follow the news, too. For example, a recent Supreme Court decision could benefit thousand of current and future federal retirees when they decide to move to a new state. The biggest winners are current and former firefighters and law enforcement personnel who move to states that exempt the pensions of retired state workers from state taxes.

Earlier this year the Court unanimously agreed to block West Virginia from exempting retired state and local firefighters and law officers pensions from state taxes while taxing the annuities of retired federal LEOs and firefighters. In Dawson v. Steager the court said:

“The West Virginia law that taxes the retirement income of federal marshal but exempts from taxation state and local law enforcement officers unlawfully discriminates against federal employees, in violation of 4 U.S.C. § 111.

“In a unanimous opinion authored by Justice Neil Gorsuch, the Court found that the state law confers a benefit to state and local retirees that federal retirees cannot receive and that there are no ‘significant differences between the two classes’ of employees that justify differential treatment. The Court found unpersuasive the state’s arguments that the law affects too few people to meaningfully interfere with federal government operations and that the statute is not intended to harm federal retirees. The prohibition on discrimination, 4 U.S.C. § 111, applies to any state tax, not only those that are cumbersome, and the state’s purpose in adopting the discriminatory tax is irrelevant. With no meaningful distinction between retired federal marshals and state law enforcement retirees, the state cannot treat the two classes of retirees differently for purpose.”

Over the years starting in 1819, the court has generally said that states cannot discriminate in taxes between their own employees and federal workers. The 19th-Century case involved the state of Maryland’s efforts to tax the Bank of the United States.

West Virginia is a favorite vacation and retirement spot for many people on the East Coast. Now it is likely to look even better to tens of thousands of federal, state and local law enforcement personnel many of whom are forced to retire early because of health issues or mandatory age limits.

The April issue of NARFE magazine, published monthly for members of the National Active and Retired Federal Employee Association, was devoted to different state tax laws. Regardless of whether you are retired or have years to go this one is worth checking out — and passing on to a friend or coworker.

For the state-by-state tax guide click here.

Nearly Useless Factoid

By Amelia Brust

Legendary PBS painter and show host Bob Ross developed his fast painting methods while in the Air Force in Alaska, in which he served for 20 years. He went home on lunch breaks and painted while he ate, taking his works to sell the same day. Eventually he realized he could make more money from his art than in the Air Force and quit.

Source: Military.com

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