Pa. makes magazine’s top 10 as tax-friendly to retirees

State’s treatment of nest eggs praised

Allegheny County residents smarting from the sting of new property assessments may not agree, but Pennsylvania was just picked as one of the 10 most taxfriendly states for retirees.

The rankings by Kiplinger magazine compared a variety of taxes including sales, income, retirement and inheritance taxes. Local taxes were not a factor.

Pennsylvania ranked high overall primarily because the state largely avoids dipping into retirees’ nest eggs by not taxing Social Security benefits, public and private pensions, or distributions from IRAs and 401(k)s, said Rachel Sheedy, retirement editor for the personal finance publication.

The state’s high ranking from Kiplinger follows several other recent surveys that have pointed to the Pittsburgh region in particular as one of the most livable places for retirees.

Last October, for example, Pittsburgh showed up on U.S. News and World Report’s list of “10 Best Places to Retire in 2012.” The region was praised for a low cost of living coupled with a variety of amenities valued by people as they age, from leading hospitals and free mass transit to cultural activities such as the ballet and symphony.

For its part, Kiplinger focused only on a retiree’s tax burden, not the state’s weather or other factors that go into selecting the best retirement home.

Other states joining Pennsylvania in the magazine’s Top 10 were Alaska, Delaware, Nevada and Wyoming, plus a string of southern states: Alabama, Georgia, Louisiana, Mississippi and South Carolina.

The least tax-friendly states were California, Connecticut, Minnesota, Montana, Nebraska, New Jersey, New York, Oregon, Rhode Island and Vermont.

Florida, a retiree magnet, did not make the magazine’s top 10 list, although the state received a “tax friendly” designation.

In a side-by-side comparison using Kiplinger’s analysis, it wasn’t clear why Pennsylvania ranked higher than Florida.

Both states have a 6 percent sales tax with both exempting food and medicines from the levy. Pennsylvania also exempts most clothing.

Neither state taxes retirement income.

In Florida’s favor, it has no state income tax or inheritance tax, while Pennsylvania has both.

“It’s not an exact science,” Ms. Sheedy said of the rankings. “There are judgment calls that are made. My understanding is that property taxes and insurance are quite high in Florida and are costly for retirees.”

Although Pennsylvania has an income tax, it’s a relatively modest 3.07 percent, she said.

“So if retirees have other income, they are taxed at a relatively lower rate.”

Overall, the tax burdens in Florida and Pennsylvania “stack up pretty closely,” Ms. Sheedy said. “Just the fact that retirement income escapes tax in Pennsylvania, we really liked that.”

Charles Enis, associate professor of accounting at Penn State University, pointed out that although Pennsylvania treats retirement income favorably when it comes time to withdraw the money, people end up getting hit at the front end because contributions are not tax-free.

“If you are living in Pennsylvania and putting money into retirement accounts and getting it taxed, then when you take it out it’s tax free, that is probably on the surface not a good deal,” Mr. Enis said.

Of course people from other states coming to Pennsylvania to retire would only have to worry about how distributions were treated.

Ms. Sheedy said people should use the rankings only as a starting point in evaluating a locale for retirement. Seniors “should do their own research to see if the area is a good fit for them,” she said.

“They also need to drill down into local taxes, which we did not go into.”