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Trying to find the most tax-friendly place to retire?

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One of my favorite things to do is sit on our local beach with a cold beverage on a beautiful day, and talk finance with interested friends and family members. This past Labor Day weekend, I did just that with a soon-to-be retiree.

One of the big issues facing him and his wife: where to live. He had been relocated to New York by his employer. But he and his wife are natives of the Philadelphia region, and they want to return to the area to be closer to friends and family.

As often happens when retirees and near-retirees talk, the subject of taxes in retirement came up. They’re considering Pennsylvania, New Jersey and Delaware for their retirement years. My wife and I are wrestling with the same issue.

Fortunately, there’s extensive information on the internet. Thirty-seven states and the District of Columbia don’t tax Social Security. But many of these states tax other forms of retirement income. Kiplinger has a good site that provides a detailed state-by-state explanation of the taxes that retirees face, grading each state on its tax-friendliness.

Read: There is more to picking a place to retire than low taxes — avoid these 5 expensive mistakes

I analyzed locations in the three states that my friends are considering. Specifically, I looked at: Lewes, Del.; Ocean City, N.J.; and Blue Bell, Pa. I assumed annual income of $145,000, comprised of a $60,000 pension, $45,000 in Social Security and $40,000 of retirement account withdrawals. I also assumed a married couple filing a joint return. Here’s what I found:

1. Real estate. I compared the property taxes for a $500,000 home in the three locations. I used real estate listings and public records to compare similar-sized homes. Delaware was the clear winner at $1,700. Ocean City and Blue Bell were almost the same at $4,900 and $4,600, respectively.

2. Social Security. None of the three states tax Social Security.

3. Pension and retirement income. Delaware taxes income from pensions and retirement accounts, but provides a deduction of $12,500 for those age 60 and older. The deduction is $2,000 if you’re under 60. Tax rates can be as high as 6.6%. This highest rate kicks in on taxable income above $60,000.

New Jersey is a little complicated. The state taxes income from pensions and retirement account withdrawals, but provides a special pension exclusion for those 62 and older who fall below a certain income threshold. In 2020, filers meeting the age requirement, and who have total annual income of $100,000 or less, can exclude retirement income of up to $75,000 (single filers) or $100,000 (joint filers). Above $100,000, the exclusion disappears entirely. Tax rates range from 1.4% to 10.75%.

Meanwhile, Pennsylvania doesn’t tax either pensions or withdrawals from IRA and 401(k) accounts.

4. Sales tax. Delaware is famous for having no sales tax. Many nearby nonresidents take advantage by making large purchases there. Pennsylvania’s statewide rate is 6%, but there are exemptions for products such as clothing, groceries, prescription drugs and residential fuels.

The New Jersey statewide rate is 6.625%. Again, there are exemptions for items that are especially important to seniors. Medicine (prescription and nonprescription), groceries and many types of clothing are exempt from New Jersey’s sales tax.

5. Capital gains. Delaware, New Jersey and Pennsylvania tax short- and long-term capital gains as regular income.

6. Estates. Delaware repealed its estate tax in 2018. New Jersey has an inheritance tax. Bequests to non-relatives, siblings and distant relatives are taxed at rates ranging from 11% to 16%, with the first $25,000 exempt.

Pennsylvania also has an inheritance tax. The inheritance tax rate varies depending on the relationship of the inheritor to the decedent. The tax is 0% for spouses, 4.5% for direct descendants like children and grandchildren, 12% for siblings and 15% for everybody else.

The table below summarizes the scenario I evaluated. Delaware is a modest winner once sales taxes are factored in. If we assume that $40,000 of the $145,000 income is spent on taxable items, it adds another $2,600 or so to the New Jersey and Pennsylvania tax bill. The upshot: A retiree who lives in Ocean City, N.J., would pay about $2,000 more in taxes than a similar retiree in Lewes, Del. That’s not necessarily a game changer, but certainly something to consider.

Tax

Lewes, Del.

Ocean City, N.J.

Blue Bell, Pa.

Federal

$16,764

$16,764

$16,764

State

$4,330

$252

$0

Income tax

$21,094

$17,016

$16,764

Property tax

$1,700

$4,900

$4,600

Sales tax rate

0%

6.63%

6%

Sales tax on $40k

$0

$2,650

$2,400

Total tax

$22,794

$24,566

$23,764

Inheritance tax

No

Yes

Yes

One important factor not captured in this analysis: the cost of housing. I used $500,000 as the assessed value, but that can buy very different homes in the three locations. Also, depending on the age of the house, the assessed value for tax purposes could be much lower than the market value.

A final caveat: It’s critical to understand the New Jersey hard limit of $100,000 in total income to get the retirement income exclusion. An additional $1,000 of income raises the New Jersey state tax from $252 to $2,746.

Richard Connor is a semiretired aerospace engineer with a keen interest in finance. His previous articles include Paradise Lost, Much Appreciated and Victims of the Virus. Follow Rick on Twitter @RConnor609.

This column first appeared on Humble Dollar. It was republished with permission.





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Despite falling unemployment, America’s poverty rate just reached the highest level since the pandemic began

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As of last month, the U.S. poverty rate has been on an upward trajectory.

Between February and March, the rate of poverty in the U.S. increased by 0.5 percentage points to 11.7%, resulting in the highest level since the onset of the coronavirus pandemic, though the change wasn’t statistically significant. That’s second only to 11.6% recorded in November 2020. These estimates were taken before the rollout of the Biden administration’s American Rescue Plan.

Since spring of 2020, real-time poverty data in the U.S. has been tracked every month by economists Bruce Meyer, from the University of Chicago Harris School of Public Policy, and James Sullivan of the University of Notre Dame’s Department of Economics and the Wilson Sheehan Lab for Economic Opportunities.

More than 100 million claims for unemployment insurance have been filed over the last year, the economists wrote with co-author Jeehoon Han of Zhejiang University in China, describing the government’s three stimulus packages.

“While new UI claims fell sharply from April through July of last year, weekly claims have remained high since then at more than 1 million claims each week, about 5 times the pre-pandemic rate,” they added.


‘Many government benefits expired, unemployment insurance benefits are typically only about half of pre-job loss earnings, and nearly 5 million people have left the labor force since the start of the pandemic and, therefore, are not counted as unemployed.’

Those who experienced the sharpest rise in poverty included children, white people, women, those with low education, and those in nearly half of U.S. states that have more restrictive unemployment-insurance payment policies. Last month marked the first time that poverty has been so acute for children, non-minorities and women, the report added.

Under the American Rescue Plan, individuals making less than $75,000 a year in adjusted gross income received $1,400. The payments decreased for individuals earning $75,000 and up — and phased out completely for those making $80,000 or more and couples making $160,000 or more in adjusted gross income. It was the third such relief package over the last year.

Unemployment fell to 6% in March 2021 from a seasonally adjusted 14.8% in April 2020, as poverty rose. Initial jobless claims filed traditionally through the states fell to a seasonally adjusted 576,000 from 769,000 in the prior week, the government said last week, marking the largest decline since August. Yet 16.9 million people are still reportedly collecting benefits.

“This disconnect between poverty and unemployment is not surprising given that many government benefits expired, unemployment insurance benefits are typically only about half of pre-job loss earnings, and nearly 5 million people have left the labor force since the start of the pandemic and, therefore, are not counted as unemployed,” the economists added.

In the last week of March, 20 million Americans getting by primarily due to the generosity of friends and family were more likely to be suffering from food insecurity, according to a separate analysis by Claire Zippel, a research analyst at the Center on Budget and Policy Priorities, a think tank focused on the impact of budget and tax issues on inequality and poverty.

Also see: George Floyds and Christian Coopers are all around you — they are your neighbor, teacher, co-worker and friend



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These money and investing tips can help you stay upright against the market’s headwinds

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you greater knowledge about the financial markets’ current condition as you monitor your portfolio and plan ahead. Plus, check out several short videos about whether to include bitcoin and other cryptocurrency in your portfolio and how to go about it if you do.

Sign up here  to get MarketWatch’s best mutual funds and ETF stories emailed to you weekly!

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Opinion: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

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Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

Read: These are the best new ideas in retirement

If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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