Dave Carpenter, AP Personal Finance Writer
CHICAGO (AP) — Lowering your tax bill can make all the difference in retirement.
Taking maximum advantage of tax breaks and other strategies will make savings last longer, which is critical for those living on a fixed income.
That means tax planning can't end with the annual filing deadline, however. Just as workers are becoming more self-reliant in financing their retirements, it's increasingly important for retirees to be savvy about the tax consequences of their actions.
"Today's seniors have a host of decisions to make regarding managing their tax burdens — from where to live to how to take money from accounts to charitable giving," says Mark Steber, chief tax officer for Jackson Hewitt Tax Service.
Those decisions have the potential to reduce federal and state income taxes while also taking the impact of property, sales and other taxes into consideration.
That doesn't mean taxes should be the sole motivation behind a key move or transaction. But a bit of long-term tax planning can go a long way.
Retirees may be able to lower their annual tax liability by thousands of dollars with some modest effort, Steber suggests.
Here are some potential ways to reduce taxes in retirement:
Consider moving to a more tax-friendly state. Your pension and 401(k) distributions, as well as dividend and interest income, generally are taxable. That could provide the financial incentive to relocate to one of the nine states with no broad-based personal income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax at all, and New Hampshire and Tennessee tax only dividends and interest.
Still, it's important not to overlook other taxes. High property and sales taxes can partially or fully offset the absence of a state income tax, as is the case in Florida.
Perhaps leaving money to your heirs is a priority. Even if your estate isn't large enough to owe money under the federal estate tax, be aware that 14 states and the District of Columbia have their own estate taxes. And eight states impose a separate inheritance tax, paid by the recipient rather than the estate.
Details are at the Retirement Living Information Center site, www.retirementliving.com .
You might be able to move just a small distance to make a big difference. In the Washington, D.C., area, Maryland and the District of Columbia each have $1 million estate tax thresholds, while neighboring Virginia has no estate tax. It's not uncommon for area retirees to sell their homes and move to Virginia for that reason, says Donald Williamson, executive director of American University's Kogod Tax Center in Washington.