What You Likely Don’t Know About Taxes in Texas (and Georgia and Alabama)

Crafting a successful retirement plan isn’t just about working hard to maintain your income and growing your savings. It’s also about finding ways to reduce unnecessary spending and keeping more of what is yours.

A critical piece of this equation is tax efficiency. If you can minimize taxes, you can lower the pressure on your investment returns and keep more of your money.

When it comes to retirement planning, the cost of living in the Southern part of the United States is typically lower than other regions. This is just one of the reasons so many retirees decide to fly South for retirement. However, as it pertains to taxes, there can be a few surprises.

With offices in and around Houston, Texas; Atlanta, Georgia; as well as Birmingham and Huntsville, Alabama, the financial advisors at Linscomb & Williams want you to be aware of a few important tax rules in the South. With more than 50 years of experience helping families with their retirement planning in the South, the following considerations are often where we see retirees shocked.

No one likes financial surprises, especially in retirement when you’re often on a fixed income. For more information about planning a retirement in the South, check out our new guide: Retiring in the South

 

Retiring Down South? Contact the team at Linscomb & Williams to see how we can help you create a comprehensive retirement plan that works for you.

 

Taxes on Social Security

If your retirement plans take you to Texas, Georgia or Alabama, you’ll be pleased to find out that Social Security benefits are exempt from taxes in all three states. As a staple of retirement income for tens of millions of Americans, this can be a huge benefit.

According to reports, more than 60 percent of retirees rely on Social Security for at least half of their income, so every dollar that a retiree can save can make a big difference. Furthermore, the average Social Security benefit is $1,500 but can surpass $3,000 if certain criteria is met. Individuals who were unable to form a large nest egg before retiring greatly benefit from Social Security, and avoiding its taxation can be a huge benefit.

Other Retirement Income Tax

When it comes to other vital sources of retirement income, specifically retirement account distributions, pensions distributions and capital gains taxes, there are small, but important differences between Texas, Georgia and Alabama.

The Lone Star State (Texas) does not tax any of the three retirement income sources mentioned above. The money you receive from your retirement accounts, pensions and even investment gains won’t cause any tax ramifications, meaning these critical sources of income can go straight to your bank account.

Like Texas, Alabama residents don’t pay taxes on pension distributions either, but they do pay taxes on retirement account distributions and capital gains. Retirement account withdrawals are treated as income, and capital gains taxes can be as much as 5 percent in Alabama.

Georgia, on the other hand, taxes all three sources of income. The good news is, individuals can claim a retirement tax exclusion up to $35,000 between ages 62 and 65. Later, this exclusion jumps to $65,000 at age 65, which can be very helpful for retirees.

Estate and Inheritance Taxes

Estate and inheritance taxes are another concern of retirees.

Other states may stand in the way of an efficient transfer of wealth between generations, but not Texas, Georgia or Alabama. Fortunately, these states do not have estate taxes or inheritance taxes. Comparatively, a handful of other states will tax your estate, and these taxes can be quite large, depending on the size of your estate.

Real Estate and Property Taxes

While the state of Texas has some of the most favorable tax treatment in some categories, it ranks last or near last in the U.S. regarding real estate. Texas’ property tax is the seventh-highest in America, reaching nearly 2 percent, or $2,200 per year on average. Keep this in mind if you are planning on adding to your real estate portfolio after relocating to Texas. It should be noted that homeowners age 65 or over in Texas qualify for some relief from property taxes.

Alabama is on the opposite end of the spectrum from Texas in regards to property tax. Not only does Alabama have the seventh-lowest housing costs in America overall, but it also has the second-lowest property tax rate. On average, Alabama residents pay only 0.44 percent for property taxes.

Georgia is made up of a tapestry of counties, all with different tax rates. Nevertheless, the property tax rate reaches about 0.83 percent on average, which is still considerably lower than the 1.03 percent average for the rest of the country.

Sales Tax

Often times people forget that there are tax implications for everyday shopping.

A few points of note: Texans are required to pay 4 percent in state sales tax, and up to another 4 percent for local taxes. As a very small form of consolation for potentially an 8 percent sales tax rate, the state offers a sales tax holiday, where businesses have the option of eliminating sales tax for customers on certain qualifying purchases.

In Alabama, with varying rates based on the type of item purchased, the sales tax can hit 9 percent in some cases. While this rate is high, remember that the state is still tax-friendly for retirees in many other areas.

Georgia’s sales tax also leans toward the high end. The state tax rate is 4 percent, but local sales taxes can tack on an additional 2 to 4 percent, bringing your total sales taxes to the 6 to 8 percent range. Shoppers may not be thrilled with this tax rate, but perhaps the tax benefits in other categories can serve as a buffer.

Why It’s Important to Have a Strategy for Uncle Sam

As the saying goes, taxes are one of two guarantees in life. Fortunately, you can still think strategically about your financial picture, and find the state or locale that best fits your and your family’s financial needs. When deciding between states to spend your Golden Years in, think about where your income is coming from and work with a financial advisor who can help you evaluate how the state in question will treat your strongest financial resources.

Remember, you don’t need to complete this process alone! The financial advisors at Linscomb & Williams can help untangle the complexity of your tax planning strategy within your retirement plan. Each component of your retirement picture, from preserving your income sources to forming a strong financial legacy for your dependents, can be made more tax-efficient with the right financial advisor.

Don’t think you need help? Every dollar saved from tax losses is a dollar earned for your future!

Contact us. A complimentary conversation can go a long way.

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Lauren Rich, CFP®

Lauren Rich, CFP®

Lauren Rich is a principal and wealth advisor for Linscomb & Williams.

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