If it's five years or less to your military retirement, now is the time to review your retirement tax situation and re-evaluate your military retirement plan.
 
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Planning Your Tax-friendly Military Retirement

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You're thinking ahead, to your eventual retirement from the military. Or maybe military retirement is your very next step.

If you're thinking about settling down to milder weather and lower expenses, it`s time to examine the taxes you'll be required to pay after military retirement. If it's five years or less to your military retirement, now is the time to review your retirement tax situation and re-evaluate your military retirement plan.

Taxes play a large part in measuring how well and for how long you can expect your military retirement funds to support your military retirement lifestyle.

TAXES FROM THE TOP: FEDERAL TAX, STATE TAX, PROPERTY TAX

The single most taxing part of your retirement lifestyle will be, well.taxes. Federal taxes are roughly the same all over. Where you settle after military retirement will determine what portion of your military retirement money will go towards state and local taxes, which will vary - sometimes a great deal - from state to state.

Local tax also includes property tax, if you own a home or plan to buy a new one that better suits your military retirement lifestyle. And while home prices have decreased recently, property taxes are not expected to decrease much if at all.

Examining all the tax implications of military retirement means you'll be prepared to enjoy your home, maintain your lifestyle, and make the most of your military pension and military retirement funds.

STATE INCOME TAX...OR NOT

Did you know that not all states have an income tax?

Seven states-Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming-have no state income tax. Zero.

Two states-New Hampshire and Tennessee-tax only dividend and interest income that exceeds certain limits.

Still, many of the remaining 41 states (and the District of Columbia) offer generous incentives for retirees. And choosing one of these retiree-friendly areas could be more beneficial than settling in a state with no income tax. Here's why: in tough economic times, states without a personal income tax have fewer sources of revenue and are more likely to raise property or sales taxes.

For example, state tax revenues plunged nearly 12% during the first three months of 2009, the sharpest decline on record. It may take some states years to make up the shortfall.potentially, with raised taxes.

TAXES ON YOUR MILITARY PENSION?

In civilian life, paying tax on your pension can be a fact of life. But your military pension may be tax-exempt, depending on which state you live in.

Ten states-Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania-exclude all federal, military and in-state government pensions from taxation.

Pennsylvania and Mississippi exempt all retirement income-including distributions from IRAs and 401(k) plans.

Three states that fully tax pensions and other retirement income also coincidentally have top tax brackets: California (9.55% on income less than $1 million), Rhode Island (9.9%) and Vermont (9.5%). Connecticut and Nebraska also fully tax retirement income, at 5% and 6.84%, respectively.

ADD SOCIAL SECURITY BENEFITS, DEDUCT TAXES

Many states have been moving away from taxing Social Security benefits.

In addition to the nine states that don't have individual income tax, 27 states and the District of Columbia do not tax Social Security: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.

Missouri will phase out its Social Security tax by 2012, and Iowa will gradually phase out its Social Security tax by 2014.

Kansas residents can now exclude Social Security income from their taxes if their adjusted gross income is less than $75,000, regardless of being single or married.

Seniors living in Colorado, New Mexico and Utah must add back the portion of Social Security benefits not taxed by the federal government to calculate their eligibility for certain state tax breaks.

SALES PRICE, PLUS SALES TAX

When you're looking for a military retirement that affords you access to the best things in life, remember that state sales tax can add hundreds of dollars to the sticker price of items you want, like that brand new iPhone, car, or appliance.

Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax. Contrarily, California's increased sales tax of 8.25% is the highest statewide sales tax in the nation. Indiana, Mississippi, New Jersey, Rhode Island and Tennessee are tied for second with state sales tax of 7%.

Most states allow cities and counties to assess their own sales tax . Chicago imposes a 10.25% combined sales tax, the highest of any major U.S. city. Combined rates can reach 10% in Alabama, Arizona and California. Only three states-Connecticut, Kentucky and Maine-do not allow municipalities to impose their own sales tax on top of state levies.

Be prepared; more than 500 U.S. cities either have already increased their sales-tax rate or have initiated a new sales tax

OWN YOUR HOME AND OWE PROPERTY TAXES

Some military veterans look to retire in states that have no state income tax. But sometimes, high state property taxes can more-than-offset the lack of a state income tax.

Since property taxes are a long term, ongoing commitment, how much you'll pay in local property taxes directly affects how much of your military retirement money you'll get to keep.

Property tax rates vary significantly from state to state and even among cities or counties within the same state. Many local jurisdictions offer property-tax breaks to full-time residents. Some property tax breaks are based on age alone, others are closely linked to income.

The silver lining for military retirees, and all military personnel looking to buy a home: the year 2009 has seen lowered home prices including those in sought-after luxury locations such as Naples, Fla., Scottsdale, Ariz., and Hilton Head, S.C.

As always, access to VA mortgages continues to help make homeownership possible for active duty military and veterans.



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