2008 CCH Whole Ball of Tax

Contact:
Leslie Bonacum, 847-267-7153, mediahelp@cch.com
Neil Allen, 847-267-2179, neil.allen@wolterskluwer.com

Finding a Tax-friendly State for Retirement, CCH Provides an Overview

(RIVERWOODS, ILL., January 2008) – The adage, it’s a nice place to visit, but I wouldn’t want to live there, takes on new meaning for retirees as where they live during retirement can have a significant impact on their tax obligation during their golden years, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and pension information, software and services (CCHGroup.com).

“As with anyone, retirees have several criteria for where they want to live and they need to make sure that the impact taxes can have is one of the factors if they’re concerned about preserving their retirement savings,” said CCH State Tax Analyst Kathleen Thies, JD.

Taxing Retirement Income Varies State to State

Each of the 50 states is generally allowed to determine its own tax treatment of retirement income. For example, some exempt pension income entirely from state income, like Pennsylvania, while others exempt a portion of pension income up to a certain level, like Michigan, and others add an age restriction. For example, in New Jersey, you must be 62 or older to exclude a portion of your retirement income from state tax. Some states also provide special tax breaks for income from other types of retirement vehicles. For example, Illinois allows not just income from federally qualified retirement plans to be excluded, but also certain IRA distributions and retirement payments to a retired partner.

A number of states, such as California, do not allow any exemptions for pension and other retirement income that is included in an individual’s federal adjusted gross income, while some states only exempt government or military pensions, but not private pensions.

Additionally, most states are now moving away from taxing Social Security. In addition to the nine states that do not have a broad-based individual income tax, 27 states and the District of Columbia do not tax Social Security income, with Wisconsin becoming the latest to join the non-taxing rank as of 2008. The other states either tax Social Security income to the same extent that the federal government does or provide breaks for Social Security income, oftentimes for lower-income individuals. Most recently, both Missouri and Kansas have changed state laws related to taxing Social Security income, with the maximum amount of benefits that may be deducted in Missouri going from 20 percent in 2007 (35 percent in 2008) to 100 percent for 2012 and onward, and Kansas exempting state tax on Social Security income for taxpayers with a federal adjusted gross income of $50,000 or less as of 2007 ($75,000 or less in 2008).

“There is no guarantee that this trend away from taxing Social Security benefits will continue, but it seems to be the direction many states are heading in as their populations age and tax treatment of Social Security income, therefore, becomes a bigger priority for voters,” said Thies.

State Income Tax Rates Can Bite Into Retirement

If you live in one of the seven states that do not tax individual income, your sources of retirement income are safe from state tax. These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – impose income taxes only on dividends and interest (5 percent for New Hampshire and 6 percent for Tennessee for 2007). Although you won’t be subject to a state income tax, you will have to keep in mind many of the other state-levied taxes such as property and sales tax noted below that also can chip away at retirement income.

For those living in the remaining 41 states or the District of Columbia, it’s great if the state offers preferential tax treatment for a retiree’s pension income, but it’s also important to understand what the state income tax rate will be for income that will be taxed.

Those states with among the highest maximum 2007 income taxes include California (with a maximum marginal state income tax rate of 9.3 percent), District of Columbia (8.5 percent), Hawaii (8.25 percent), Iowa (8.98 percent), Maine (8.5 percent), New Jersey (8.97 percent), North Carolina (8 percent) and Oregon (9 percent). But even that is not clear cut. For example, California imposes an additional 1 percent tax on taxable income in excess of $1 million, and, while Massachusetts has a short-term capital gains state tax rate of 12 percent, all remaining income is taxed at 5.3 percent.

Other Tax Considerations for Retirees

In addition to taxes on income, taxes on retirees’ general living expenses, as well as their home, can quickly add up.

Sales Tax

Seniors should consider how much of their savings will be going to pay for sales tax. Five states – Alaska, Delaware, Montana, New Hampshire and Oregon – have no state sales tax. Those with the highest sales tax include: Mississippi, New Jersey, Rhode Island and Tennessee, each with a 7-percent sales tax. A chart on state sales tax is available at http://www.cch.com/press/news/2007/stateconsumptiontax2007.pdf.

In addition to the state tax, retirees also should look at how much sales tax is assessed by the local municipalities, which can further add to expenses. While municipalities in most states assess their own sales tax on top of the state sales tax, the following eight states only impose a state sales and use tax and do not provide authorization for municipalities to impose such a tax: Connecticut, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan and Rhode Island.

Property Tax

Property taxes also are a major tax consideration, especially for individuals on a fixed income. These rates vary greatly from state to state and municipality to municipality. It is wise to take a look not only at existing property tax rates, but also how property tax rates have changed over the years. If you’re moving into an “up-and-coming” area versus one that is more mature, or you are moving into an area that is re-gentrifying, you may find your property taxes increasing at a higher-than-anticipated rate.

State’s Estate Tax and Inheritance Tax Vary Widely

For most people, how you will be taxed when you’re alive is far more important than what your estate will owe in state taxes when you die. However, for the heirs of the well-heeled, this is a consideration.

On the federal level, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), is steadily reducing the estate tax rate through 2009, and for 2010 there is no federal estate tax. But, should you die in 2011, the estate tax will revert to pre-EGTRRA law, meaning your estate’s federal tax will be 55 percent of the excess over $3 million (effectively, 60 percent for estates in excess of $10 million but less than $17,184,000).

Historically, states have followed federal estate tax law but, since EGTRRA, 16 states and the District of Columbia have retained their estate taxes as a way of holding onto tax revenues. These states are Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Oregon, Rhode Island, Vermont, Washington (for estates of decedents dying on or after May 17, 2005) and Wisconsin (which will be coupled to EGTRRA amended federal estate tax law for the estates of decedents dying after Dec. 31. 2007) – and the District of Columbia. In addition, Connecticut imposes a uniform tax on gifts and estates. However, Kansas’ estate tax is being phased out and will be gone in 2010. Additionally, Virginia, which was de-coupled from the federal estate tax in 2006, like many of the above-mentioned states, as of July 1, 2007 re-coupled to the federal estate tax law, meaning no state estate tax is enforced in that state.

Eight states also collect an inheritance tax, which is solely a state tax assessed on the portion of an estate received by an individual (versus an estate tax which is a tax that is assessed on the entire estate before it is distributed to individual parties). These states are: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. Connecticut phased out its inheritance tax starting in 2006. Assets transferred to a spouse are exempt from the tax, and some states also exempt assets transferred to children and close relatives.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem™, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has 2006 annual revenues of €3.4 billion, employs approximately 18,450 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com.

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State Taxation of Retirement Income

The following shows, generally, which states tax retirement income, including Social Security and pension income. States shaded indicate they do not tax Social Security or pension income.

For a more detailed explanation, refer to the online analysis on the CCH Press Center at cch.com/wbot2008. See Release 11.

State	State Tax of Social Security Income	State Tax of Pension Income
Alabama	Not taxed	Certain pension income not taxed
Alaska	No individual income tax	No individual income tax
Arizona	Not taxed	Generally taxable
Arkansas	Not taxed	Exempt to certain level
California	Not taxed	Generally taxable
Colorado	Exempt to a certain level	Exempt to a certain level; age restrictions apply
Connecticut	Exemption based on adjusted gross income (AGI)	Generally taxable
Delaware	Not taxed	Exempt to a certain level; age restrictions apply
District of Columbia	Not taxed	Generally taxable
Florida	No individual income tax	No individual income tax
Georgia	Not taxed	Exempt to a certain level; age restrictions apply
Hawaii	Not taxed	Distributions are partially exempt
Idaho	Not taxed	Generally taxable
Illinois	Not taxed	All income from federally qualified pension plan is generally exempt
Indiana	Not taxed	Generally taxable
Iowa	Exempt to a certain level	Exempt to a certain level; age restrictions apply
Kansas	Exemption based on AGI	Generally taxable
Kentucky	Not taxed	Exempt to a certain level
Louisiana	Not taxed	Exempt to a certain level; age restrictions apply
Maine	Not taxed	Exempt to a certain level, excluding IRA and SEP distributions
Maryland	Not taxed	Exempt to a certain level; age restrictions apply
Massachusetts	Not taxed	Generally taxable
Michigan	Not taxed	Exempt to a certain level, excluding certain 401(k) and 403(b) distributions
Minnesota	Taxed	Generally taxable
Mississippi	Exempt in total	Not taxed

Missouri	Exemption based on AGI	Exempt to a certain level; income restrictions apply
Montana	Exemption based on AGI	Exempt to a certain level; income restrictions apply
Nebraska	Taxed	Generally taxable
Nevada	No individual income tax	No individual income tax
New Hampshire	Only dividends and interest are taxable	Only dividends and interest are taxable
New Jersey	Social Security excluded from gross income	Exempt to a certain level; age and income restrictions apply
New Mexico	Taxed	Exempt to a certain level; age and income restrictions apply
New York	Not taxed	Exempt to a certain level; age restrictions apply
North Carolina	Not taxed	Exempt to a certain level
North Dakota	Taxed	Generally taxable
Ohio	Not taxed	Credit for pension distribution or income allowed; age restrictions apply
Oklahoma	Not taxed	Exempt to a certain level; age restrictions apply
Oregon	Not taxed	Credit for pension distribution or income allowed; age restrictions apply
Pennsylvania	Not taxed	Not taxed
Rhode Island	Taxed	Generally taxable
South Carolina	Not taxed	Exempt to a certain level; age restrictions apply
South Dakota	No individual income tax	No individual income tax
Tennessee	Only dividends and interest are taxable	Only dividends and interest are taxable
Texas	No individual income tax	No individual income tax
Utah	Exemption based on AGI	Exempt to a certain level; age and income restrictions apply
Vermont	Taxed	Generally taxable
Virginia	Not taxed	Exempt to a certain level; age and income restrictions apply
Washington	No individual income tax	No individual income tax
West Virginia	Taxed	Generally taxable
Wisconsin	2007, exempt to a certain level. 2008, not taxed.	Generally taxable
Wyoming	No individual income tax	No individual income tax

State Tax Treatment of Social Security and Pension Income

The following CCH analysis provides a general overview of how states treat income from Social Security and pensions. States shaded indicate they do not tax Social Security or pension income.

State	Social Security Income	Pension Income
Alabama	State computation not based on federal. Social Security benefits excluded from taxable income.	Individual taxpayer’s pension income from retirement pay from a qualified pension or an IRC Sec. 414(j) defined benefit plan is not taxed.
Alaska	No individual income tax.	No individual income tax.
Arizona	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Arkansas	State computation not based on federal. Social Security benefits excluded from taxable income.	Up to $6,000 total in retirement pay benefits and benefits received from an individual retirement account (IRA) is exempt.
California	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Colorado	Pension income, including Social Security benefits, up to $24,000 may be subtracted from federal taxable income by those 65 and older, and up to $20,000 by those 55 and older or those who are second-party beneficiaries of someone 55 or older.	An individual taxpayer 55 through 64 years can exclude up to $20,000 ($24,000 for a taxpayer aged 65 or older) in pension and annuity income.
Connecticut	Joint filers and heads of households with AGIs under $60,000 and individuals with AGIs under $50,000 deduct from federal AGI all Social Security income included for federal income tax purposes. Joint filers and heads of households with AGIs over $60,000 and individuals with AGIs over $50,000 deduct the difference between the amount of Social Security benefits included for federal income tax purposes and the lesser of 25% of Social Security benefits received or 25% of the excess of the taxpayer's provisional income in excess of the specified base amount under IRC Sec. 86(b)(1).	Individual taxpayer’s pension income is generally taxable.

Delaware	Social Security benefits subtracted from federal AGI.	An individual taxpayer under 60 may deduct pension amounts of up to $2,000, and a taxpayer 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer 60 or older include retirement income (that is, dividends, capital gains realization, interest and rental income).
District of Columbia	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Florida	No individual income tax.	No individual income tax.
Georgia	Social Security benefits subtracted from federal AGI.	For 2007, an individual taxpayer aged 62 or older may exclude up to $30,000; after 2007, $35,000 of retirement income (but earned income is limited to $4,000).
Hawaii	Social Security benefits subtracted from federal AGI.	Distributions derived from employer contributions to pensions and profit-sharing plans are exempt.
Idaho	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Illinois	Social Security benefits subtracted from federal AGI.	Income from a federally qualified retirement plan, and an IRA, as well as retirement payments to a retired partner is excluded.
Indiana	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Iowa	No more than 50% of Social Security benefits taxable. Subtraction allowed for 32% of federally taxable benefits for tax years 2007 and 2008; 43% in 2009; 55% in 2010; 67% in 2011; 77% in 2012, and 89% in 2013. For tax years after 2013, Social Security benefits are fully exempt.	Married taxpayers 55 or older filing a joint return may exclude up to $12,000 ($6,000 for an unmarried taxpayer) of pension benefits and other retirement pay. A special rule applies to a spouse filing separately. .
Kansas	For 2007, taxpayers with a federal AGI of $50,000 or less may subtract Social Security benefits before the determination of state AGI. For 2008 and thereafter, taxpayers with a federal AGI of $75,000 or less are exempt from any state tax on their Social Security benefits.	Individual taxpayer’s pension income is generally taxable.
Kentucky	Social Security benefits subtracted from federal AGI.	After 2005, $41,110 of retirement income from a pension plan, annuity contract, profit-sharing plan, retirement plan or employee savings plan, including IRA amounts and other similar income, is exempt.

Louisiana

Social Security benefits subtracted from federal AGI.

Up to $6,000 of the pension and annuity income of an individual taxpayer 65 or older is exempt.

Maine	Social Security benefits subtracted from federal AGI.	A recipient of pension benefits under an employee retirement plan may generally subtract from federal AGI the lesser of: –$6,000 (reduced by the total amount of the recipient’s Social Security benefits and Railroad Retirement benefits paid); or –the aggregate of pension benefits received by the recipient under employee retirement plans and included in the individual’s federal AGI.
Maryland	Social Security benefits subtracted from federal AGI.	For 2007, up to $23,600, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer 65 or older.
Massachusetts	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Michigan	Social Security benefits subtracted from federal AGI.	For 2007,up to $42,240 in pension and retirement income is deductible on a single return ($84,480 on a joint return); however, distributions from certain 401(k) or 403(b) plans are taxable.
Minnesota	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
Mississippi	State computation not based on federal. Social Security benefits exempt in total.	Retirement allowances, pensions, annuities or “optional retirement allowances” (that is, income from Keogh plan, IRA or deferred compensation plan) are exempt.

Missouri

Social Security benefits that are included in federal AGI may be subtracted. The maximum amount of benefits that may be deducted is as follows: 20% for 2007, 35% for 2008, 50% for 2009, 65% for 2010, 80% for 2011, and 100% for 2012 and after.

An individual taxpayer may deduct from state AGI up to $6,000 from a qualified annuity, pension, Keogh plan, IRA, IRC Sec. 401(k) plan and/or deferred compensation plan.

The deduction is applicable only to the extent that such amounts were included in the taxpayer's federal AGI and not otherwise deducted.

To qualify for the full $6,000 subtraction, a taxpayer’s state AGI must not exceed:

–$100,000, if married filing jointly;

–$85,000, if married filing separately; or

–$85,000 for any other filing status.

For a taxpayer with an income level above the AGI limits listed above, the $6,000 exemption is reduced by $1 for each $1 of income over the limit.

For the purpose of establishing these AGI limits, Social Security benefits are excluded from state taxable income.

Montana

Separate calculation to determine taxable Social Security benefits. Benefits exempt if income is $16,000 or under for single filers, $25,000 or under for heads of households, or $32,000 and under for married taxpayers filing jointly.

For an individual taxpayer, up to $3,600 of pension and annuity income is exempt (reduced by $2 for every $1 of federal AGI that exceeds $30,000). A disabled retiree may be able to exclude such income up to $5,200.

Nebraska

State computation begins with federal AGI. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Nevada	No individual income tax.	No individual income tax.
New Hampshire	Only dividends and interest are taxable.	Only dividends and interest are taxable.
New Jersey	State computation not based on federal. All Social Security benefits are excluded by statute from gross income.	Married taxpayers filing jointly and 62 or older with an income of $100,000 or less may exclude up to $20,000 of pension or annuity income, or of IRA withdrawals ($10,000 if an individual taxpayer is married and filing separately or $15,000 for a single taxpayer, a head of household or a qualifying widow(er)).
New Mexico	State computation begins with federal AGI. No subtraction.	An individual taxpayer 65 or older may exempt up to $8,000 of income, including pension income, depending upon the individual's filing status and federal AGI. Joint filers, a surviving spouse or a head of household with AGI of $51,000 or more are ineligible for this exemption. A married individual filing separately becomes ineligible at $25,500. A single individual becomes ineligible at $28,500.
New York	Security benefits subtracted from federal AGI.	For an individual taxpayer age 59 1/2 or older, $20,000 of pension and annuity income is exempt.

North Carolina	Social Security benefits subtracted from federal taxable income.	Up to $2,000 in retirement benefits, other than railroad retirement benefits, received during the tax year from one or more private retirement plans, and included in federal gross income, is deductible. For a married couple filing a joint return, the maximum amount that may be deducted applies separately to the benefits received by each spouse.
North Dakota	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
Ohio	Social Security benefits subtracted from federal AGI.	A recipient of retirement income may claim an annual credit ranging from $25 to $200, depending on the amount of benefit received during the year. Also, in lieu of the $50 senior citizen income credit (credit eligibility is dependant on age not retirement income) an individual taxpayer 65 or older may claim a credit for a lump-sum distribution from a retirement, pension, or profit-sharing plan equaling $50 times the taxpayer’s expected remaining life years. However, if they choose the lump sum distribution credit, they are no longer eligible for the annual senior citizen credit.
Oklahoma	Social Security benefits subtracted from federal AGI.	For 2007, $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer 65 or older with AGI of $50,000 or less for a single taxpayer, a head of household or a married taxpayer filing separately ($100,000 or less for married taxpayers filing jointly or a qualifying widow(er)).
Oregon	Social Security benefits subtracted from federal taxable income.	An individual taxpayer 62 or older may claim a credit for pension income from a public or qualified private pension benefit plan in the amount of the lesser of 9% of the individual’s net pension income or the individual’s state personal income tax liability.

Pennsylvania	State computation not based on federal. Social Security benefits not included in state taxable income.	Individual taxpayer’s pension income is not taxed.
Rhode Island	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
South Carolina	Social Security benefits subtracted from federal taxable income.	An individual taxpayer receiving retirement income may deduct up to $3,000. A taxpayer 65 or older may deduct up to $10,000. The personal income tax deduction from taxable retirement income can only be claimed by the taxpayer who is the original owner of a qualified retirement account.
South Dakota	No individual income tax.	No individual income tax.
Tennessee	Only dividends and interest are taxable.	Only dividends and interest are taxable.
Texas	No individual income tax.	No individual income tax.
Utah	State computation begins with federal taxable income. No subtraction, except Social Security income eligible for inclusion in retirement income deduction for taxpayers under age 65 of up to $4,800 and retirement income exemption for taxpayers age 65 and older of up to $7,500. Deduction and exemption reduced by 50 cents of each dollar of income exceeding $32,000 for married taxpayers filing jointly, $16,000 for married taxpayers filing separately and $25,000 for single taxpayers.	For an individual taxpayer under age 65, retirement income from a pension or annuity of up to $4,800 is exempt (for a taxpayer aged 65 or older, $7,500 is exempt). (For married taxpayers filing jointly, the exemption is reduced by 50 cents for each $1 of AGI over $32,000; for a married taxpayer filing separately, the exemption is reduced by 50 cents for each $1 of AGI over $16,000; and, for an individual taxpayer, the exemption is reduced by 50 cents for each $1 of AGI over $25,000.)
Vermont	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.

Virginia	Social Security benefits subtracted from federal AGI.	The $12,000 deduction available to an individual taxpayer 65 or older is reduced $1-for-$1 for every $1 that the taxpayer’s adjusted federal AGI exceeds $50,000 ($75,000 for married taxpayers). For a married taxpayer filing separately, the deduction is reduced by $1 for every $1 that the total combined adjusted federal AGI of both spouses exceeds $75,000
Washington	No individual income tax.	No individual income tax.
West Virginia	State computation begins with federal AGI. No subtraction.	Individual taxpayer’s pension income is generally taxable. However, subject to some qualification, an individual taxpayer who, by the last day of the tax year, has reached age 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI.
Wisconsin	Partial exclusion (no more than 50% of Social Security benefits taxable). Full exclusion effective beginning in tax year 2008.	Individual taxpayer’s pension income is generally taxable.
Wyoming	No individual income tax.	No individual income tax.