No state taxes, and favorable property tax exemptions make this sunny state a favorite for retirees.
Florida, known for its sunny beaches and vibrant retirement communities, is also famous for its tax-friendly environment for retirees.
What Makes Florida Unique?
Florida’s tax environment is particularly attractive to retirees due to its combination of no state income tax, no taxation on retirement income, and no estate tax. This trifecta of tax benefits is relatively rare among states and can result in significant savings for retirees.
Income from Employment
One of the most significant advantages for retirees in Florida is the absence of a state income tax. This means that any income from employment, whether it’s from a part-time job or a new post-retirement career, is not subject to state taxation. Retirees only need to consider federal income tax on their employment earnings.
Investments
Florida’s tax-friendly stance extends to investment income as well. The state does not tax:
- Capital gains
- Dividends
- Interest income
This can be particularly beneficial for retirees who rely on investment income to fund their retirement. However, it’s important to note that while Florida doesn’t tax these forms of income, they are still subject to federal taxation.
Pension
Pension income, like other forms of income, is not taxed at the state level in Florida. This applies to both public and private pensions. Retirees moving from states that do tax pension income may find this aspect of Florida’s tax system particularly appealing.
Retirement Distributions
Distributions from retirement accounts such as 401(k)s and IRAs are also free from state income tax in Florida. However, these distributions are still subject to federal income tax rules. For traditional IRAs and 401(k)s, distributions are taxed as ordinary income at the federal level. Roth IRA distributions, if qualified, remain tax-free at both state and federal levels.
Social Security
Florida does not tax Social Security benefits, adding another layer of tax savings for retirees. However, as in all states, depending on your overall income, a portion of your Social Security benefits may be subject to federal income tax. Depending on your total income (social security plus any additional taxable income such as employment), you may be liable to pay federal taxes on up to 85% of your social security benefits.
Medicare
While Medicare isn’t directly taxed, it’s worth noting that Florida, like all states, follows federal guidelines for Medicare. This means that high-income earners may be subject to additional Medicare premiums, known as Income-Related Monthly Adjustment Amounts (IRMAA).
Sales Tax
Florida does impose a state sales tax, currently set at 6%. Local governments can add their own sales tax on top of this, potentially bringing the total up to 8.5% in some areas. While this might seem high compared to some states, it’s important to remember that this sales tax partially offsets the lack of state income tax.
Property Tax
Property taxes in Florida are assessed at the local level and can vary significantly depending on the county and municipality. The average effective property tax rate in Florida is around 0.98%, which is relatively close to the national average.
However, Florida offers some property tax benefits for retirees:
- Homestead Exemption: Homeowners can claim a homestead exemption on their primary residence, which can reduce the taxable value of their home by up to $50,000.
- Save Our Homes Assessment Limitation: This caps the annual increase in assessed value of homesteaded property to 3% or the change in Consumer Price Index, whichever is lower.
- Senior Exemption: Some counties and municipalities offer additional exemptions for seniors aged 65 and older who meet certain income requirements.
Estate Tax
Florida does not impose a state estate tax or inheritance tax. This can be a significant advantage for retirees looking to pass on their wealth to heirs. However, estates may still be subject to federal estate tax if they exceed the federal exemption threshold.
Financial Breaks for Retirees
In addition to the tax benefits mentioned above, Florida offers several other financial breaks for retirees:
- Homestead Exemption and Save Our Homes benefit for property taxes
- Senior Exemption on property taxes in some localities
- “Sales Tax Holidays” for certain items during four different periods of the year (such as back-to-school supplies, outdoor recreation items and events, disaster preparedness supplies, and tools and equipment)
- Discounts on various services and attractions for seniors
Reshaping Retirement Plans
While Florida’s overall tax environment is favorable, retirees should consider the following when planning:
- Higher sales tax: Budget for slightly higher expenses due to sales tax on purchases.
- Property taxes: While not the highest in the nation, property taxes can still be substantial, depending on your location and budget. However, median home prices in Florida of $418,097 are about par with the national median of $412,300 as of Q2 2024, according to the Federal Reserve Bank of St. Louis. . Consider the Homestead Exemption and other property tax breaks when budgeting.
- Insurance costs: Florida’s vulnerability to hurricanes can lead to higher homeowners insurance premiums. Factor this into your retirement budget.
- Income diversification: With no state tax on various forms of income, retirees might consider diversifying their income sources to maximize tax efficiency.
The Benefits of Working with a Financial Professional
Navigating retirement planning and tax strategies can be complex, especially when considering a move to a new state like Florida. Working with a financial professional can provide invaluable assistance in optimizing your retirement plan to take full advantage of Florida’s tax benefits while ensuring your overall financial health. You can find a licensed professional here. To find a licensed professional in Florida, click here.
Lotus Li, CPA/PFS is the CEO of Hive TA Technologies Inc. in Mission Viejo, CA. She is a member of the American Institute of CPA’s (AICPA)’s PFP Champions task force.