Massachusetts is often portrayed as an expensive place to retire. Housing costs are high, property-tax bills can be substantial, and affluent residents may face both the state’s income surtax and an estate tax.
But the tax picture is more complicated than the reputation suggests. Massachusetts does not tax Social Security benefits, and certain federal and state pensions may also escape state income tax. Retirees also benefit from access to major medical institutions, cultural attractions, public transportation, higher education and outdoor recreation.
The decision becomes more difficult for longtime homeowners and successful savers. A valuable home combined with a large retirement account may push an estate above Massachusetts’ $2 million estate-tax threshold. Retirees may also overpay state income taxes if they fail to document retirement contributions that were not deductible on their Massachusetts tax returns.
Jim Guarino, CPA/PFS, is a managing director at Baker Newman Noyes and a PFS Champion at the AICPA. He discussed what retirees should understand before deciding whether to remain in Massachusetts or establish residency elsewhere.
Below is a transcript of the interview with Guarino, edited for brevity and clarity.
What should retirees know first?
Bob Powell: Is Massachusetts a good place to retire from a financial standpoint?
Jim Guarino: You have to look at the individual facts and circumstances. Massachusetts taxation can be a concern, particularly for affluent retirees, but the state also offers benefits that can persuade people to remain here.
New Hampshire is next door and does not impose an individual income tax on wages or an estate tax. Many Massachusetts residents also have homes in Florida and consider making Florida their permanent residence. But taxes should not be the only factor in that decision.
You need good information and, in many cases, advisers who can help you evaluate the trade-offs.
What retirement income does Massachusetts tax?
Bob Powell: Many retirees receive Social Security benefits and federal or state pensions. How are those income sources treated?
Jim Guarino: The good news is that Social Security income is not taxable in Massachusetts. Federal and Massachusetts state pensions also may not be taxable.
Other forms of retirement income can be taxable. Massachusetts divides income into different categories. Most ordinary income, including IRA distributions, wages, business income and taxable pension income, is generally subject to the state’s 5% rate. Long-term capital gains are also generally taxed at 5%, while short-term gains and gains on collectibles fall into a different category.
Retirees need to understand where each income stream fits before calculating their state tax liability.
How can retirees overpay IRA taxes?
Bob Powell: You have said there is one retirement-income mistake that taxpayers frequently make. What is it?
Jim Guarino: Massachusetts does not provide the same deduction for certain IRA and retirement-plan contributions that may be available on a federal return. Self-employed taxpayers also may not receive a Massachusetts deduction for some contributions to their retirement plans.
That creates an important issue when the money is eventually distributed.
If you made a contribution and never received a Massachusetts tax deduction for it, the portion of a later distribution attributable to that contribution should not be taxed again by Massachusetts. But the taxpayer must be able to establish that basis.
The mistake I see is that the full taxable distribution reported for federal purposes automatically flows onto the Massachusetts return. That may not be correct.
Bob Powell: That information is not calculated for the retiree on Form 1099-R, correct?
Jim Guarino: Correct. It requires your own due diligence and record keeping. Those contributions could have been made 40 years before you begin taking distributions.
Good records are critically important. Without them, a retiree may have difficulty proving that a portion of the distribution has already been taxed by Massachusetts.
When does the millionaire surtax apply?
Bob Powell: What should higher-income retirees know about the Massachusetts surtax?
Jim Guarino: Massachusetts imposes an additional 4% tax on income above an inflation-adjusted threshold that originally began at $1 million.
Most ordinary income is generally taxed at 5%. Once a taxpayer’s income exceeds the applicable threshold, the amount above it may be subject to the additional 4% surtax.
This can matter to retirees who recognize an unusually large amount of income in one year. The issue is not limited to someone who earns a seven-figure salary every year.
What deductions may retirees claim?
Bob Powell: Are there deductions or exemptions that may help older residents?
Jim Guarino: Massachusetts provides personal exemptions, including an additional exemption for taxpayers who are 65 or older. There are also exemptions for dependents.
Renters may qualify for a deduction based on rent paid, subject to the state limit. Retirees who continue to work or operate a business may also qualify for a deduction related to Social Security and Medicare taxes they pay.
Certain federally deductible medical expenses may carry through to the Massachusetts return, although the state applies its own requirements. Some commuting costs and tolls may also qualify for a deduction, which may help retirees who continue to work part time.
The exact eligibility rules and limits should be reviewed for the tax year in question.
Why can property taxes feel so high?
Bob Powell: Property taxes are another concern for retirees. What should homeowners understand?
Jim Guarino: The average property-tax rate in Massachusetts may not appear extreme compared with other states. The larger problem is the value of the property being taxed.
Many Massachusetts homeowners own highly appreciated real estate. Even when the tax rate appears moderate, applying it to an expensive home can produce a substantial annual bill.
It is a good problem and a bad problem. The homeowner owns a valuable asset, but that value can make the cost of remaining in the home difficult to manage.
What sales taxes affect retirees?
Bob Powell: What should retirees know about the state sales tax?
Jim Guarino: Massachusetts imposes a 6.25% sales tax. Groceries, qualifying clothing purchases and prescription medications generally receive favorable treatment or exemptions.
Massachusetts also sometimes authorizes a sales-tax holiday, although that is determined from year to year. Consumers should confirm the applicable dates, purchase limits and exclusions before relying on it.
Bob Powell: That is the one time I do not have to drive to New Hampshire to buy something.
Jim Guarino: Yes, wink, wink.
Why does the estate tax matter?
Bob Powell: Massachusetts does not impose an inheritance tax, but it does have an estate tax. Why should retirees be concerned?
Jim Guarino: The Massachusetts estate-tax exemption is $2 million. An estate above that level may owe state estate tax.
That threshold can become relevant faster than many people expect. A longtime homeowner may own a house worth well into six figures or even seven figures. If that person has also accumulated a substantial retirement account, the combined value may exceed $2 million before counting other assets.
It is not hard to imagine breaching the threshold pretty quickly.
Massachusetts estate-tax rates range from relatively low rates to as much as 16%, depending on the size of the taxable estate.
How can couples reduce estate taxes?
Bob Powell: What planning strategies can help reduce or manage the Massachusetts estate tax?
Jim Guarino: Massachusetts does not provide the same portability treatment available under the federal estate-tax system. At the federal level, a surviving spouse may be able to use a deceased spouse’s unused exemption if the required steps are taken. Massachusetts does not provide comparable portability.
The basic planning objective is to avoid wasting either spouse’s $2 million exemption.
Couples should examine how their assets are titled and allocated between them. The goal is to make sure each spouse has sufficient assets to use the available exemption rather than having nearly everything owned by one spouse.
More advanced planning may involve trusts, charitable planning or completed gifts to family members. Those strategies require guidance from an estate-planning attorney and tax adviser because transferring assets can have significant tax, legal and financial consequences.
Why might retirees remain in Massachusetts?
Bob Powell: We have covered many of the taxes. What are the strongest non-tax reasons to remain?
Jim Guarino: Health care is probably first. Massachusetts residents have access to major medical institutions, and access to high-quality care becomes increasingly important as people age.
The state also offers history, museums, entertainment and cultural institutions. Within a few hours, residents can reach the mountains or the ocean. Public transportation can reduce dependence on a car in some communities.
Massachusetts also has longstanding colleges and universities that may appeal to children and grandchildren. Residents get four distinct seasons, including the New England fall, and major professional sports teams.
Those benefits may be difficult to assign a dollar value to, but they matter when someone is deciding where to spend retirement.
Should retirees leave Massachusetts?
Bob Powell: What is the bottom line for someone considering a move to New Hampshire, Florida or another state?
Jim Guarino: Do not make the decision based on one tax rate.
Look at all of your income sources, the value of your property, your potential estate-tax exposure and the cost of living in each location. Then consider health care, family, community, transportation and the lifestyle you would give up.
Massachusetts taxation can be a concern, particularly for affluent households. But Massachusetts offers a great deal that may persuade retirees to remain residents.
Bob Powell: I often say I never want to be more than 10 miles from Massachusetts General Hospital because I do not want to be airlifted there.
Jim, thank you for sharing your knowledge with us.
Jim Guarino: My pleasure. Thank you, Bob.
