Money Matters
In Louisiana, you get to keep more of your hard-earned money than you think!
By Mark A. Newman
It is no secret that Louisiana has a lot to offer anyone who appreciates the finer things in life. Whether it's wonderful food, delightful music, amazing weather, the beautiful natural splendor, or the wonderful people, there is no other state in the union quite like Louisiana. But what a lot of people might not realize is that Louisiana's financial climate is very beneficial to residents when it comes to taxes.
Encore Louisiana spoke with tax pro John Sirois, a Certified Financial Planner, attorney, and investment adviser who spends a lot of his time helping retirees—as well as pre-retirees—with their financial questions. John is the author of the book Louisiana Retirement and Estate Planning, the authoritative tome for individuals thinking about retirement.
We asked John some very pointed questions about why Louisiana is such a great place for anyone thinking of moving or staying in Louisiana as their retirement party plans get underway.
Q. Although Louisiana has great climate, food and culture, what are the financial advantages to retiring in the Bayou State?
A. For one thing, Louisiana has a low income tax burden. Louisiana’s state and local tax burden is below the national average and ranks as the eighth lowest in the nation (Source: The Tax Foundation). But to make things easier, here is a list of just some of the financial advantages to being a Louisiana resident:
- Louisiana's health care costs are below the national average. In addition, Louisiana's health care expenses have increased at the second lowest rate in the nation.1
- The cost of living in Louisiana is below the national average.2
- Louisiana does not impose inheritance, estate, or gift taxes.
- Louisiana is one of only nine states that allow federal income taxes to be deducted when calculating state income taxes. This results in a reduced tax burden.
- Louisiana exempts all federal, state, and local pensions from state income taxation. In addition when recipients of retirement income (from IRAs, 401(k) plans, private pensions) turn 65, they may exclude the first $6,000 from state income taxes. Couples married filing jointly who receive retirement income may exclude up to $12,000 from state income taxes. Out-of-state pensions qualify for the private pension exclusion.
- Louisiana does not tax Social Security benefits or military or government pensions.
Q. How are retirement accounts, annuities, life insurance, etc. protected in Louisiana?
A. Louisiana law provides enhanced creditor protection for retirement accounts, annuities, and life insurance.
Louisiana also provides exemptions for life insurance that allow the protection of a significant amount of wealth. Life insurance benefits paid to a beneficiary are exempt from the claims of the insured’s and the beneficiary's creditors under Louisiana law. The exemption applies to all liability for any debt of any beneficiary existing at the time the death benefit or the cash value is made available for the beneficiary's use.
Annuities are also protected from seizure with generous exemptions under Louisiana law. The exemption applies to all annuities: deferred, immediate, fixed, variable and equity-indexed, whether in accumulation or pay-out phase. Annuity contracts and payments from annuity contracts are exempt from creditor claims of the owner, annuitant, beneficiary, or payee.
Louisiana law also protects IRAs3 and other tax-deferred retirement plans4 and proceeds and payments from such plans from seizure by creditors.
Q. Louisiana is a community property state, but what does that mean for residents?
A. Community property provides a tremendous income tax advantage to surviving spouses through the step-up in basis for the surviving spouse upon the first spouse’s death. For example, Max and Marian own a tract of land as community property worth $100,000, with a cost basis of $10,000. Upon Max's death, half of the land's value is included in Max's estate; however, the entire tract of land receives a step-up in basis to the land's value on the date of Max's death. Marian may now sell the land without paying capital gain taxes on the land due to the step-up in basis to fair market value. If the property were the separate property of Marian, there would be no step-up in basis upon Max's death, and the sale would cause a capital gain of $90,000.
Q. What advice do you have for people entering their 50s who are financially established with home and property but caring for parents plus student loans from children who have graduated? Is there anything else that the state provides besides claiming the interest?
A. There is no magic bullet for the "sandwich" generation who must care for their parents and their own children. People who are in this position must have a plan that establishes priorities to ensure they stay on track to meet their retirement goals. They should use caution not to jeopardize their own retirement plan. They may also consider requiring their children to help pay down some of their college education debt. Their children have a much longer time horizon to save for retirement and can focus on paying down debt rather than saving for retirement. A retirement cash flow analysis can help determine how much needs to be saved for retirement and how much can be diverted to other needs.
Q. When downsizing a home (that is owned in full) and purchasing a smaller home (at a lesser value), how does one avoid paying substantial capital gains?
A. The tax code allows married couples to exclude up to $500,000 of capital gain from the sale of their principal residence from taxation. Single taxpayers may exclude up to $250,000. The home must have been owned and used as the principal residence for two out of the five years prior to the sale. The two year requirement does not have to be sequential. If the home was used as the taxpayer's principal residence for a minimum aggregate total of two years, the exemption applies.
Q. How beneficial is Louisiana's homestead exemption for residents?
A. Louisiana's homestead exemption is one of the most generous in the nation which results in a low property tax burden for Louisiana residents. In fact, Louisiana residents pay the lowest amount of property taxes in the nation (Source: http://www.taxfoundation.org).
As a result of Louisiana's generous homestead exemption, more than half of Louisiana homeowners pay no property taxes. Louisiana's homestead exemption exempts the first $75,000 of market value from property taxes. Louisiana residents over age 65 may qualify for a Special Assessment which freezes the market value of the home to prevent future property tax increases. For 2009, persons over the age of 65 with adjusted gross income less than or equal to $64,655 may apply for the Special Assessment.
Q. Conventional wisdom says that a person needs about 70% to 80% of their working income to retire. Is that number accurate for retiring to Louisiana?
As a rule of thumb, 70% is a good starting point; however, each retiree is unique. Due to Louisiana's low state, local, and property tax burden and below average cost of living, retirees in Louisiana should be able to retire on a lower percentage of their working income than many other states. A retirement cash flow analysis is vital to determining how much you will need during retirement. A thorough analysis will consider income needs, inflation, taxes, length of retirement, portfolio values, investment returns, Social Security, and other income to determine how much a retiree can spend during retirement. This type of analysis can also help pre-retirees determine how much they must save to support their desired standard of living.
Take, for example, an individual living in Manhattan where the cost of living is 2.242 times the national average and has annual retirement expenses of $100,000. If this individual moves to Baton Rouge, the same standard of living will cost $40,277. The cost of living in Baton Rouge is 0.902 of the national average. $100,000 / 2.242 = $44,603.03 x .902 = $40,231.93
It's the same situation for someone moving from Stamford, Connecticut where the cost of living is 1.461 times the national average and has annual retirement expenses of $100,000. If this individual moves to Baton Rouge, the same standard of living will cost $61,807. $100,000/1.461 = $68,446.27 x .902 = $61,783.53
Data Sources: Center for Business and Economic Research and The Council for
Community and Economic Research, University of Louisiana, Monroe and the
ACCRA Cost of Living Index 3rd Quarter 2008.
National Recognition
Louisiana and some of its wonderful communities have been highlighted by the national media as a great place to retire where you get to keep more of your money!
A 2005 report in Bloomberg's Wealth Manager magazine ranked Louisiana as fifth in the U.S. for tax-friendly states for retirees. Covington was recognized in the book Retire in Style: 50 Affordable Places Across America as an affordable place to retire.
Natchitoches was named as one of the eight great tax havens in the U.S. for retirees in 2002 by Where to Retire magazine.
Lafayette was listed as a money-saving destination with amenities in the health care category in the July/August 2009 issue of Where to Retire magazine.
Louisiana Tax Info You Need to Know:
Sales Taxes
State Sales Tax: 4%*
Gasoline Tax: $0.20/gallon
Diesel Fuel Tax: $0.20/gallon
Cigarette Tax: $0.36/pack of 20
Spirits Tax: $2.50/gallon Table Wine : $0.11/gallon
Beer : $0.32/gallon
*(3.8% for electricity, water utility services and steam; Interstate telecommunication services are taxable at 2%). Political subdivisions also levy their own sales tax that could bring the total to 10.75%. Food, drugs, wheelchairs, and prosthetic devices are taxed locally.
1 http://www.statehealthfacts.org. Health Care Expenditures measure spending for all privately and publicly funded personal health care services and products (hospital care, physician services, nursing home care, prescription drugs, etc.) by state of residence. Hospital spending is included and reflects the total net revenue (gross charges less contractual adjustments, bad debts, and charity care). Measured from 1991 to 2004. Costs such as insurance program administration, research, and construction expenses are not included in this total. For more information on how these estimates were prepared, please see http://www.cms.hhs.gov/NationalHealthExpendData/downloads/res-adjustment.pdf.
2 See ULM Center for Business and Economic Research cost of living report. All major metropolitan areas in Louisiana were below the national average.
3 Includes Roth IRAs, Education IRAs, SEP IRAs, and SIMPLE IRAs.
4 Includes 401(k), 457, 403(b), profit sharing, pension plans, etc.
