Massachusetts Among the Worst States For Retirees

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Thursday, February 06, 2014

Zeke Wright, GoLocalWorcester Contributor

Massachusetts isn't particularly friendly toward retirees when it comes to taxes.

But with tax code changes and the state's “circuit breaker” credit for seniors, the environment has improved.

“Costs of living are obviously a huge consideration in deciding where to live or retire to,” according to Sandy Weiner, a state tax analyst for Wolters Kluwer, CCH. In a recent report detailing what they'll face during the upcoming tax season, Weiner says retirees should do their homework on the types of taxes they'd be responsible for paying before choosing where to retire.

Making those retirement savings last is key to post-employment bliss. The financial advice website Kiplinger puts Massachusetts as “not tax-friendly” for seniors, despite some breaks.

Black marks against the state include taxes on private pensions and estates and a comparatively high property tax burden.

“Massachusetts doesn't tax social security benefits, which is great, but it does tax pension income,” Weiner told GoLocal. “You also have to look at the tax rate applied.”

“And then you have to look at income in states and how far does it take you.”

Massachusetts' flat 5.25 percent income tax compares favorably for top earners to states with progressively scaled tax rates, but individuals and families in brackets just above exemption levels may pay more.

Of course, cost of living is only one determining factor for relocating retirees.

“They're not buried under 8 feet of snow,” Weiner says, describing her parents after their move from Chicago to warmer climes.

Mass. environment for retirees has improved

“It's not as bad as it used to be,” according to Barbara Anderson, executive director of the statewide group Citizens for Limited Taxation. But she said the longstanding reputation still hurt the state. “Years and years ago, Massachusetts was one of the worst states. ... Things have changed over the years.”

Anderson points to the state's Proposition 2 1/2, a successful ballot measure led by her group that began limiting year-over-year property tax increases in 1982.

“The property tax is the one that hurts retirees the most,” Anderson said. Still, given the economy and current unemployment, Anderson said she didn't see retirees in particularly worse shape than most residents.

“I never thought of senior citizens as different from taxpayers in general.”

Bay State property taxes in the top 10

The median property tax in Massachusetts was $3,511 in 2009, the most recent year provided in a comparison by the Washington, D.C.-based Tax Foundation. That amount ranked 6^th in the nation but was partially driven up by comparatively high home values.

Looking at median property taxes as a percentage of income, residents in the Bay State paid 4.18 percent of their income — the 9^th highest proportion in the country.

For residents 65 years or older, the state's circuit breaker program can provide a $1,000 property tax credit (with the surplus refundable for those who owe less in total payable income tax), but that discount only applies for principal residences for those under a certain income.

State taxes private pensions, estates over $1 million

In addition to general income, sales, and property taxes, retirees dependent on pensions should pay attention to how that income is taxed. Three states — Illinois, Mississippi, and Pennsylvania — exempt pension income entirely for qualified individuals. (That's in addition to the seven states that have no individual income tax, retirement or otherwise.)

Twenty-one other states offer a partial exemption, while Massachusetts is in the remainder that generally tax most pension income according to Wolters Kluwer, CCH.

However, the situation is not as bad for retirees as in a minority of states (including Rhode Island, Connecticut, and Vermont) that tax social security income.

More seniors entering retirement with debt

More seniors today are entering retirement carrying debt.

Using data from the Bureau of Labor Statistics' Consumer Expenditure Survey and the Federal Reserve Survey of Consumer Finances, the National Center for Policy Analysis finds the percentage of individuals ages 65 to 74 reporting a mortgage or home equity loan payment has increased from 21 percent in 1989 to 37 percent in 2010.

The percentage of individuals ages 75 and older with a home payment jumped from 6 percent to 21 percent during the same time, reflecting longer periods of principal mortgage debt.

Similarly, the average value of seniors' credit card balances are also up: to an average $6,000 in 2010 for 65 to 74 year olds and an average $4,600 for 75 year olds according to the NCPA.

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