Florida Retirement Taxes
What Taxes Do Retirees Pay in Florida?
Have you ever wondered why so many people like to retire in Florida? The beautiful weather and sandy beaches are just part of the appeal. Another great thing about retiring in Florida is that the Sunshine State provides retirees with a lot of tax benefits that are not available in other states. If you are looking to retire in Florida, it is essential to make the State your full time, permanent residence. You’ll only be able to take advantage of the retirement tax benefits if you are a full-time resident and if you do your retirement planning with approved Florida institutions.
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Your Assets are Protected
In Florida, you also have protection from debt collectors and lawsuits. Any assets you hold in most retirement plans are exempt from both debt collection and lawsuits. So, if you have an IRA, annuity, or similar type of account, debt collectors will not be able to seize or garnish those funds. If you have money invested in stocks and bonds, these may also qualify for this protection. The only way you can obtain this protection is if you are a legal Florida resident, and your retirement plan was set up in Florida. If you have an IRA or an annuity in another state, these will likely not be protected. This protection does not protect you from the collection of federal income taxes by the IRS or from lawsuits that have been filed in a federal court. This protection only applies to the beneficiaries of the retirement accounts, annuities, or other insurance policies. The beneficiary’s estate could still be exposed to debt collection or garnishment if the beneficiary passes away.
Do Seniors Pay Property Taxes in Florida?
One of the biggest questions people ask, is what the property tax situation is like in the state. If you are 65 years old or older, and you have been a permanent Florida resident for at least the last 25 years, you may be able to get a 100 percent exemption on your property taxes. The property tax exemption on your property taxes only applies if your home is worth $250,000 or less. This property tax exemption will depend on your income level and in which city or county you reside in.
In addition to property taxes, there is also still as sales tax in Florida. The state sales tax rate in Florida is 6 percent. There also varying local sales tax rates per county, so with local county sales tax rates, the total sales tax rate is between a 6 percent sales tax rate and an 8.5 percent sales tax rate.
What States have the Lowest Taxes for Retirees?
Florida tops the list of great states for retirees. No other state seems to provide retirees with more legal protection for their assets than the Sunshine State. There is no personal income tax, and you don’t have to worry about losing your assets to debt collection agencies. If you’ve got a 401(k) or an IRA, there are no state taxes on distributions. Florida won’t tax your social security benefits either.
Which State is Best for Retirement Taxes?
In addition to Florida, there are some other states with significant tax benefits for retirees. Key among these states is Wyoming. As with Florida, there are no state income taxes for Wyoming residents. This means Wyoming, like Florida, does not tax your social security, 401 k, pension, or IRA distributions. The property tax rate in Wyoming is typically meager in general, which makes Wyoming another great state for retirement.
Besides Florida and Wyoming, other states that are tax-friendly for retirees include Delaware, Alabama, South Carolina, Tennessee, Georgia, Arizona, Nevada, Alaska, and Mississippi. In Tennessee, there is income tax, but it is only assessed on dividends and interest. Most of these states do not place taxes on your social security income.
How Does Social Security Work in Florida?
So, we know Florida is excellent because the State does not place taxes on your social security benefits. But how does social security even work in Florida? Insurance provided through Social Security is often referred to as SSR. According to the Social Security Administration (SSA), more than 50 million beneficiaries received SSR benefits in 2018. Out of these recipients, more than 60 percent of them rely on SSR for at least 50 percent of their monthly expenses.
Qualifying for SSR Benefits
You can qualify for SSR benefits if you have contributed to the Social Security program during your time in the workforce either through FICA such as your 401 k or through self-employment tax. The Social Security Administration will use a series of work credits to determine your eligibility for SSR benefits. You must have 40-lifetime credits if you want to qualify for SSR. You can earn up to four credits each year. Right now, workers earn one work credit for every $1,360.00 in annual income as long as this income qualifies for the FICA or self-employment tax. If you make at least $5,440 of qualifying income in one year, you automatically receive the full four work credits for that particular year. At this rate, ten years of consistent employment qualifies you to get SSR retirement income.
The minimum age you can begin receiving your Social Security income is 62 years old, but your retirement income is also based on how old you were when you started claiming benefits. The baseline age for full retirement is currently 66 years old and is set to increase to 67 years old for people born after the year 1960. If you decide to claim your Social Security income benefits before you reach the full retirement age, your payment amount for each month will be reduced. On the other hand, if you do not start claiming Social Security benefits until after you are the full retirement age, your monthly payment amount increases.
Calculating SSR Benefits
The monthly SSR payment for retirees is calculated using your Average Indexed Monthly Earnings (AIME) for the 35 highest-earning years of your professional career. The Social Security Administration will calculate your AIME by first computing the monthly average you earned for each year, then will adjust each yearly average for inflation so earlier amounts will be increased to correlate with the current dollar value. This adjusted average is then used to calculate your indexed monthly income, and this brings you to your AIME. However, if you have worked for less than 35 years, the SSA will use a zero for the average for each non-earning year up to 35 years. If, on the other hand, you have worked for over 35 years, the Social Security Administration will only take you 35 highest-earning years into consideration.
AIME does not calculate all of your income, but rather just the income subject to Social Security tax. If your earnings for a particular year are more than the cap, which is currently $132,900, AIME will not take into account the excess amount. Additionally, if you have earned income outside of those subject to FICA or self-employment tax, such as from government employment or some type of capital earnings, those types of income will not be accounted for in AIME either.
Once the SSA has calculated your AIME, the next step is to figure out your Primary Insurance Amount (PIA). This will be the baseline for your monthly benefit if you decide to claim your SSR benefits right at the age for full retirement. PIA has a tiered structure, kind of like the structure for federal income tax. The PIA tax rates formula may change over time; however, under the current method, you will receive 90 percent of the first $926 of the AIME, plus 32 percent of any amount between $957-$5,583, plus 15 percent of any remaining amount left over. The highest PIA you can earn is $2,861, assuming your maximum contribution of 35 years. The average across the United States for PIA is around $1,450.
SSR and Retirement Planning
The nice thing about including Social Security benefits into the plan for retirees in Florida, other than the fact that there is not a tax, is that these benefits can be used as a secure, reliable, income source providing you the peace of mind of having predictability in your monthly retirement income. If you do not plan to rely on SSR as your primary retirement source, it is still a bonus to have this additional liquid income source that you can depend on. Moreover, survivor and spousal SSR benefits in Florida are helpful in planning. The retirees SSR benefits will help to make sure dependents have some form of support.
The Florida Retirement System (FRS)
Florida retirees go through the Florida Retirement System (FRS), which offers two different retirement options for employees who work for the State of Florida. Retirees can choose the FRS Pension Plan, which will provide retirement income on a monthly basis. Or, you can select the FRS Investment Plan, which will allow you to choose how you want your money to be invested and how you will receive payments once you retire.
Pension Plans and Taxes in Florida
If you choose the FRS Pension Plan retirement option, you will receive monthly benefits based on several factors, including the age at which you retire, your salary, your position, and how long you have worked for the FRS. You contribute 3 percent of your gross salary to the pension. You can start collecting your benefits when you retire if you are (1) vested and (2) within twenty years plus or minus of your normal retirement age. If you leave after you’ve been vested, you will still get monthly benefits after you retire. If you leave before you’ve been vested; you will not be eligible for monthly benefits. However, you will be able to receive a refund of your contributions you’ve made into the system thus far.
The State does not tax Florida pension plans, but they are still subject to federal taxes. The amount you will owe on your federal income tax will depend on the tax laws that are in effect in the year in which you get your benefit payment, filing status, additional income sources, and the number of exemptions and deduction you claim.
Investment Plans and Taxes in Florida
You will receive the balance of your investment account based on how well the plan performed. You will contribute 3 percent of your gross salary. You are eligible to start collecting benefits when you leave the state employment system as long as you have at least one full year of FRS service. You can choose the one lump-sum payment option, or you can choose to receive periodic payments. If you leave before one full year of service, you are only entitled to a refund of your contributions that you have paid into the system thus far.
You must choose either the FRS Pension Plan or the FRS Investment Plan within eight months from your month of hire. If you do not make an active election, you will be automatically enrolled in the default election. If you are a member of the Special Risk Class, you will automatically default to the FRS Pension Plan. If you are a member of any other class other than the Special Risk Class, you will be automatically enrolled in the FRS Investment Plan. You can change your election status only once after the initial selection.
The State does not tax investment plans in Florida, however, they are still subject to federal taxes. If you decide to choose to receive one lump-sum payment, this payment will be taxable the year you receive it unless you roll it over into a new IRA or another plan within 60 days upon receipt. If the amount is paid to you, the account administrator will withhold 20 percent as a credit toward your federal income tax liability. If you take a lump-sum initially, then decide to roll over an amount, it has to be equal to your distribution before withholding. It must include an amount from your resources to replace the amount that was withheld. You may be able to forego the 20 percent withholding if you request either a direct rollover or a direct transfer to a new plan, rather than taking an initial lump-sum.
Florida Retirement Taxes FAQs
Are pensions and Social Security taxed in Florida?
- Florida has no state income tax which means pensions are not taxed.
Do seniors pay property taxes in Florida?
- Individuals who are aged 65 or above, own a house worth less than $250,000, and earn less than $20,000 in income do not pay property tax in Florida.
What states have the lowest taxes for retirees?
- Alaska, Florida, Georgia, Mississippi, Nevada, South Dakota, and Wyoming have low taxes for retirees. This includes low taxes on retirement income, inheritance, sales, and property.
Final Word on Retirement Taxes in Florida
Many people choose to retire to Florida for sandy beaches, sunny weather, and a comfortable atmosphere. Although all of these things are attractive reasons to retire in the Sunshine State, the most attractive reason may be the tax friendliness. Florida ranks high on the list of tax-friendly states for retirees. If you are planning to retire in Florida, start planning now to ensure you will be qualified for all the tax benefits the State has to offer!