State tax breaks on retirement income from pensions and investments are saving older Georgians about $864 million this year.
They also may be adding to the Peach State’s appeal.
"Georgia is one of the 10 most tax-friendly states for retirees," Kiplinger.com, publishers of personal finance advice and business forecasts, said in a press release on Monday, October 26th.
We know how the state loves a rosy ranking.
Remember Gov. Nathan Deal appearing gleeful when, running for re-election campaign, he could point to Georgia’s naming by Site Selection magazine as the nation’s No. 1 state for business climate?
Seeing the Kiplinger rankings we wondered: Is the Peach State really giving money-conscious retirees a reason to feel all warm and fuzzy?
We decided to check.
Kiplinger.com actually says Georgia ranks as the fifth most-friendly tax state behind Alaska, Wyoming, Nevada and Mississippi and immediately ahead of Delaware, Arizona, Louisiana, South Dakota and Florida.
Several state tax policies factored into that ranking, including Georgia’s exemptions from estate, inheritance and Social Security taxes, as well as its 4 percent statewide sales tax.
Also cited was the state income tax break we mentioned earlier.
This exclusion allows a retiree who is 65 year or older to shield from state income taxes up to $65,000 in pension or investment income a year if single, $130,00 a year if married. It helps younger retirees -- ages 62 to 64 -- too. They are exempt from state income tax on as much as $35,000 of most types of retirement income, $4,000 in wages
Retirement income includes interest, dividends, net income from rental property, capital gains, royalties, pensions, annuities and the first $4,000 of earned income, such as wages.
By comparison, Kiplinger picked Alaska as true tax haven for retirees. Alaskans pay no state income or state sales taxes. Each permanent Alaska resident receives an annual dividend check from the state’s oil wealth savings account. In 2014, the dividend check was $1,884. Real estate is taxed in Alaska, but homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed
Georgia’s been helping seniors for years
In his eight years in office, Gov. Sonny Perdue persuaded lawmakers to cut and eventually eliminate the state income tax on retirement income.
Perdue and supporters hoped the move would attract well-to-do retirees to Georgia and away from states, such as Florida, where there is no state income tax.
Having 750,000 retirees on his side -- always a powerful voting block -- didn’t hurt.
But in 2012, lawmakers decided it would be too costly to go through with Perdue’s plan to wipe out state income taxes for retirees, arguably one of his greatest legacies They settled on the current cap and pushed it through as part of the Georgia Jobs and Family Tax Reform Plan of 2012.
Even reduced, it "is one of Georgia’s largest tax exemptions," Wesley Tharpe, senior policy analyst with the left-leaning Georgia Budget & Policy Institute said."It is a very expensive proposition for the state."
Seniors definitely get a good deal in Georgia, especially wealthy retirees with pensions and IRAs, Tharpe said.
The exclusion is structured so the benefits "disproportionately go to wealthy retirees," he said.
The higher income earners, he said, can draw $60,000 from an IRA in a year and not face any state income tax on that money. But a person trying to supplement his or her Social Security by taking a $10,000-a-year job is only sheltered from state income taxes on the first $4,000 of earnings and has to pay on the other $6,000 in wages, Tharpe said.
But does Georgia really have the nation's fifth friendliest tax policy for retirees?
On the rankings
Norton Francis, a senior research associate with the Urban Institute’s State and Local Finance Initiative, said the ranking is likely "pretty much true," largely because of Georgia's generous pension exemption.
But both he and Carl Davis, research director with the Institute on Taxation and Economic Policy, said they questioned whether the Kiplinger rankings took into account that local governments in Georgia can levy up to a 4 percent sales tax, including on groceries.
Davis said those taxes on groceries could be more significant to seniors than the state's estate tax exemption.
He also expressed concern that the most-to-least rankings ignore the diverse nature of retirees.
" A low-income senior living on Social Security is impacted by state and local taxes in a very different way than a middle-income person collecting a pension or a very high-income person living off their investments," Davis said.
Kiplinger, he said, appeared to have used a subjective process to evaluate the states, something Sandra Block, senior associate editor at Kiplinger’s Personal Finance acknowledged.
"The fact that they did not assign formal weights to different tax parameters is problematic and makes a full review of their rankings impossible," Davis said.
Block said it’s "precisely because retirees are a very diverse group that we’re reluctant to assign weights to different types of taxes.
" Instead, we try to provide as much information as we can on the taxes most seniors pay so that individuals can draw their own conclusions," Block said.
Francis and Davis said state tax policies aren’t likely to be a retiree’s primary consideration in deciding where to live.
"Other things are going to matter more -- chiefly housing and energy costs," Davis said, adding that those are likely a retirees’ two biggest expenses.
Several studies have examined whether these tax breaks motivate senior citizens to relocate.
One study, in 2012 by University of New Hampshire economist Karen Smith Conway, found "no credible effect of state income tax breaks on elderly migration."
Conway said the research "should give pause to those who justify offering state tax breaks to the elderly as an effective way to attract and retain the elderly."
Kiplinger.com, publishers of personal finance advice and business forecasts, said Georgia is one of the 10 most tax-friendly states for retirees. Georgia actually placed 5th on its list, although the ranking doesn’t appear to take into account local sales taxes.
Georgia’s tax breaks also do more for higher income retirees than for those in the middle and lower ranks. That’s important context the reader needs.
We rate the statement Half True.
"Kiplinger.com Unveils List ofTax Heavens, Hells for Retirees —‘Retiree Tax Map’ Offers Easy, Interactive State-By-State Guide—," press release from Kiplinger.com, Washington, D.C.. Oct. 26, 2015
Emails with Taylor Engart, The Rosen Group for Kiplinger.com
Emails with Jacob Streiter, The Rosen Group for Kiplinger.com
Email and phone call with Carl Davis, research director at the Institute on Taxation and Economic Policy
About Carl Davis, Institute on Taxation and Economic Policy
Interview with Norton Francis, a senior research associate with the Urban Institute’s State and Local Finance Initiative
About Norton Francis, senior research associate, Urban Institute
"Senior tax exemption may dry up," The Atlanta Journal-Constitution, By James Salzer, March 1, 2011,
Interview with Wesley Tharpe, senior policy analyst, Georgia Budget & Policy Institute
About Wesley Tharpe, Georgia Budget & Policy Institute
Email statement from Sandra Block, senior associate editor at Kiplinger’s Personal Finance
"No Country for Old Men (Or Women) Do State Tax Policies Drive Away The Elderly? National Tax Journal, June 2012, by Karen Smith Conway and Jonathan C. Rork
"State Taxes Have a Negligible Impact on Americans' Interstate Moves," Center on Budget and Police Priorities, May 21, 2014
Social Security Benefits are not taxed.
Exemptions for Other Retirement Income
Taxpayers who are 62 or older are eligible for a retirement-income exclusion. Retirement income includes pensions and annuities, interest, dividends, net income from rental property, capital gains, royalties, pensions, annuities, and the first $4,000 of earned income, such as wages. For married couples filing joint returns with both members receiving retirement income, the maximum adjustment may be up to twice the individual exclusion amount. The retirement-income exclusion is $35,000 for residents ages 62 to 64. For residents 65 or older, the exclusion is $65,000. Railroad Retirement income is exempt.
IRAs -- Qualifies for retirement-income exemption of up to $35,000 or up to $65,000, depending on age.
401(k)s and Other Defined-Contribution Employer Retirement Plans -- Qualifies for retirement-income exemption of up to $35,000 or up to $65,000, depending on age.
Private Pensions --Qualifies for retirement-income exemption of up to $35,000 or up to $65,000, depending on age.
Public Pensions -- Qualifies for retirement-income exemption of up to $35,000 or up to $65,000, depending on age.
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