Moving in Retirement to Cut Tax Costs? Consider These 4 Factors First.

When an affluent suburban Chicago couple came to John Campbell, senior wealth strategist at U.S. Bank Private Wealth Management, planning to retire in New Mexico because of its weather and lower income and property tax rates, Campbell started digging into the tax-burden differences between the two states.

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He found Illinois would be cheaper for this particular couple. That is because Illinois doesn't tax Social Security or distributions from retirement assets, while New Mexico taxes them both. The couple decided to live part-time in New Mexico, while maintaining Illinois residency for tax purposes.

Costs matter in retirement, and the lure of living in a state with no income taxes or lower income taxes can be strong. But advisors say retirees should focus on total taxation, including sales and property taxes, both of which are often higher in states with no income tax. Retirees may find that moving isn't the cost-saver they thought it would be.

"If you end up paying an extra 4%, 5%, or 6%, that diminishes your purchasing power," Campbell says.

Here are four things to consider before you move in retirement.

What Will Your Sources of Income Be in Retirement?

In addition to Illinois, 11 other states typically don't tax retirement distributions. Most states don't tax Social Security, but popular retiree destinations such as Colorado and New Mexico, plus nine other states, do tax it. Campbell also suggests that retirees who will depend on dividends and interest should check how a state treats this income. He notes New Hampshire, which has no income tax, levies a 5% tax on those payments. However, that is set to expire in 2027.

Property Taxes Can Sting

States with no income tax have to get their revenue somewhere, and high property taxes are a likely source. Texas is a case in point.

The national average is 0.90% of assessed home value, and Texas averages 1.6% or higher, according to the Tax Foundation.

Florida has a homestead exemption which limits how quickly property taxes rise for homeowners. Once a home is sold, the exemption is lifted and the home is reappraised for property taxes. Because home prices in Florida have increased significantly in the past few years, the appraised value is likely to be much higher than previously, meaning higher taxes.

While the new homeowners can apply for their own homestead exemption, it will be off this higher property tax value. Out-of-state buyers need to look closer at what their property taxes will be based on the home's assessed value and not what the previous owner paid.

"It really can surprise people when they move into their home to find out their taxes are much higher," says Michael Wagner, chief operating officer at Omnia Family Wealth in Miami.

Don't Forget Sales Taxes

Tennessee has no individual income taxes, but its state sales tax is a lofty 7%, and municipalities can tack on another 2.75%. Robert Gilliland, managing director at Houston-based Concenture Wealth, notes that Texas sales tax can top out at 8.25%.

Florida also has a high sales tax, at least 6%, and counties can tack on another 1.5%, for a maximum of 7.5%. Wagner says sales taxes are the main way Florida collects revenue and it has a high consumption tax because it is such a heavy tourism state.

Gas Taxes Matter for Heavy Drivers

Gas taxes and the amount of driving a person may do in their new state could have an unexpected bite. The American Petroleum Institute puts Illinois gas tax at 59 cents a gallon, Florida at 43.5 cents, and Texas at just 20 cents. However, because Florida and Texas are so spread out, people moving there might be buying a lot more gasoline.

"Quite frankly, to go from one side of Houston to the other might take you an hour and a half," Gilliland says.

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