Tax Havens For Retirees

When I retire, I plan to live off my dividends and other passive income. California, which is basically broke, which has pretty high state taxes is not the most optimal place - especially once you don't have a job and have the flexibility to live in cheaper places. Some states like Nevada, have on tax on personal income, while some like New Hampshire only tax interest and dividends (definitely retiree unfriendly). Forbes recently had an article about states Wooing Retirees With Tax Breaks.

Last month, even as they slapped a new tax on hospitals, raised dozens of
user fees and eliminated a low-income tax credit, Georgia legislators passed
income tax relief for one group: well-off retirees. For residents 62 or older,
Georgia already exempts from its 6% tax all Social Security and $70,000 per
couple of income from pensions, retirement accounts, annuities, interest,
dividends, capital gains and rents. But in 2012 the exemption for couples 65 and
older will rise to $130,000, and by 2016 all their retirement income will be
exempt--a break Governor Sonny Perdue championed as a lure for well-heeled
seniors.

If you're looking for a domestic retirement tax haven, Georgia is hardly the only place worth considering. Seven states--Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming--don't tax personal income at all. New Hampshire and Tennessee tax interest and dividends but not other income. The rest of the states have broad income taxes but give old taxpayers breaks, some quite generous. A recent study by Karen Smith Conway of the University of New Hampshire and Jonathan C. Rork of Georgia State calculates that retirees pay, on average, only half the state income tax of working folks with the same income.

So depending on whether you have w-2 income or 1098-int income, you might want to consider different states to live in. Of course, higher rates of real estate taxes and estate taxes will complicate things further.