As a Delaware wealth management firm, we’re often speaking with individuals and couples seeking retirement planning guidance from neighboring states. Whether they’re here for work, come by referral, or plan to relocate to Delaware — we’re faced with the following common questions. How does Delaware stack up compared to Maryland, Pennsylvania, or New Jersey when it comes to:
Social Security,
Retirement income taxation,
Property taxes, and
Sales tax?
How much you pay in taxes each year during retirement will impact the amount of discretionary income left for traveling, treating the grandkids, tickets to a show, hiking shoes, lunch dates, and green fees — all the hobbies and entertainment. It’s important to understand, where you chose to live will impact your retirement budget.
Social Security Taxation
Just eleven states impose income taxes on Social Security at the state level. In our neck of the woods, this includes Connecticut, Rhode Island, and Vermont. Of the states we’re comparing, DE, MD, PA, and NJ — none tax Social Security benefits.
The Social Security Administration has this to say when it comes to federal taxes: “Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return).
Taxation of Traditional Retirement Income — IRA, 401k, Pensions
Some states provide a tax deduction specifically for retirement income withdrawals. Others have specific rules related to pensions, whereas others treat all withdrawals as income. Here’s a high-level overview of what you can expect for the states in question.
Delaware: Offers a $12,500 exclusion for retirement income. This is a tax deduction, meaning you don’t pay income tax on the first $12,500 withdrawn from qualifying retirement accounts each year.
Maryland: Pension recipients benefit in Maryland. $34,300 in pension withdrawals are excluded from your state income taxes each year.
Pennsylvania: Arguably the winner in this category as PA does not impose income taxes on any retirement income, including Social Security, pension payouts, and other qualifying retirement account withdrawals.
New Jersey: Unfortunately for NJ residents, there are very few exclusions when it comes to the taxation of retirement income. Some pension payout recipients will see a break at tax time, but other traditional forms of retirement income are taxed in New Jersey.
Your withdrawal strategy is unique to you, it’s important to discuss these points with an accountant to understand what you’ll owe in taxes. Your strategy may also change based on which state you call home.
Property Taxes & Median Home Value
Take a look at the following chart and you’ll see people across the US have varying financial obligations in terms of property taxes.
In many cases, Delaware will be the most affordable state when it comes to owning real estate; property values are reasonable with relatively low property taxes. If you have a $400,000 home, you can expect to pay the following in each state, annually:
Delaware: $1,920
Maryland: $3,040
Pennsylvania: $5,160
New Jersey: $7,160
There is a large spread when comparing the average tax rates for each state. It’s important to note, that while we’ve used the same property value for this comparison, what you get for your money is always location dependent. Property tax rates also vary within a state based on what county the property resides in — you could wind up paying well over 3% in some locations.
Sales Tax
Sales tax, the pesky fee you see at the register, can sneak up on us since it’s not presented as a lump sum bill. Instead, we pay sales tax over numerous transactions during the year, if your state imposes a state sales tax.
Delaware takes the cake in this category by imposing no state or local sales tax.
In Maryland, all tangible goods come with a 6% state sales tax along with a 9% sales tax on alcohol. Groceries and prescription drugs are exempt from state sales tax.
Pennsylvania also has a 6% state sales tax. Non-prepared food, items purchased with food stamps, prescription drugs, and most clothing items are exempt.
The New Jersey sales tax rate is currently 6.625%. There is no sales tax on food, clothes, or drugs.
Some states also have local taxes on top of the state sales tax. In this case, head to Delaware if you have shopping in mind. Overall, our home state of Delaware fares well in terms of affordability when compared to our direct neighbors.
Are you from New York? Considering moving to Florida, Arizona, or California? While we didn’t cover all 50 states, with this information in hand, you can easily conduct a quick audit of the location you plan to spend time in to gain a detailed understanding of how much you’ll be handing over to Uncle Sam each year.
Helping you make sound financial decisions is what we do here at Integrated Wealth Management. For tax-conscious retirement planning and wealth management, reach out to our team for a no-obligation introduction to learn more about our services.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
Continued Readings:
Sources:
https://www.bankrate.com/real-estate/property-tax-by-state/#by-state
ATTOM Data Solutions
Source for property tax rates
https://revenue.delaware.gov/frequently-asked-questions/personal-income-tax-faqs/
Source for delaware $12,500 exclusion
chrom extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.state.nj.us/treasury/taxation/documents/pdf/guides/Retirement-Guide.pdf
Source for New Jersey retirement income taxes
https://www.salestaxhandbook.com/maryland/sales-tax-exemptions
https://www.avalara.com/taxrates/en/state-rates/pennsylvania/pennsylvania-sales-tax-guide.html#:~:text=Tax%2Dexempt%20goods,but%20not%20all)%20wearing%20apparel.
Disclosure Statement
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, Past performance is not a guarantee of future results.