Comparing Retirement Income After Taxes
For retirees, the choice of where to live can have a significant impact on their net spendable income. A recent financial analysis examines a hypothetical 68-year-old married couple managing a $2 million dividend portfolio and receiving $54,000 in annual Social Security benefits. With a total gross annual income of $150,000, the difference in take-home pay between living in Texas and California highlights the complex interplay between income and property taxes.
The Federal Tax Baseline
Regardless of their state of residence, the couple faces the same federal tax obligations. Based on 2026 projections, their federal tax burden totals approximately $12,800. This is calculated after accounting for the standard deduction for married couples and the inclusion of roughly 85% of their Social Security benefits in their taxable income. The portfolio’s income is split between qualified dividends, which benefit from lower capital gains rates, and REIT distributions, which are taxed as ordinary income.
State Tax Disparities
The primary driver of the income gap between the two states is the difference in state-level taxation:
- Texas: As a state with no personal income tax, Texas allows dividends, capital gains, and Social Security income to pass through without state taxation. This results in $137,200 of net spendable income for the couple.
- California: The state taxes all forms of income—including Social Security and dividends—at rates that can reach a marginal rate of 13.3%, resulting in an effective state tax rate of roughly 7%. This reduces the couple’s net spendable income to $130,000.
This creates a $7,200 annual gap, which could equate to over $180,000 in lost purchasing power over a 25-year retirement.
The Role of Property Taxes
While Texas offers a clear advantage regarding income tax, the financial picture changes when considering property ownership. Texas is known for some of the highest property tax rates in the nation, often ranging from 1.8% to 2.5% of assessed value. Conversely, California’s Proposition 13 provides significant protections for long-term homeowners by capping the growth of assessed property values. For many retirees, the property tax savings in a long-held California home may offset the income tax disadvantage.
Key Considerations for Retirees
Financial experts suggest three critical actions for those evaluating a move for tax efficiency:
- Model the property tax swap: Do not look at income tax in isolation. Compare the potential income tax savings against the specific property tax burden of a prospective home.
- Prioritize residency timing: If planning to move, establish bona fide residency before initiating large taxable events like Roth conversions or selling assets to avoid aggressive audits.
- Adjust for investment types: Consider holding assets that are federally taxable but state-tax-free—such as certain Treasuries—which can help narrow the tax gap for residents in higher-tax states like California.
The income-tax gap widens significantly in years with capital gains, Roth conversions, or large distributions since California taxes those at 13.3% marginal rates while Texas does not.
