Why Head South?

Georgia Eases the Retirement Income Tax Burden

As retirement approaches, many Georgians have historically thought about how to establish their legal residence in the state of Florida. Florida has no state income tax for individuals.

Although Georgia has not repealed the income tax on individuals, the Georgia General Assembly has taken steps in recent years to provide for the exclusion of increasing levels of retirement income in order to ease the tax burden on retired individuals and lessen the benefit of “retiring to Florida.” Why move to the land of the Marlins if you can remain in the home of the Braves?

Georgia taxable income for individuals is defined as an individual’s federal adjusted gross income minus certain deductions or exclusions. One exclusion is an individual’s “retirement income” up to certain defined levels. Let’s look at what qualifies as “retirement income” and who is qualified for the Georgia Retirement Income Exclusion.

“Retirement income” for the Georgia Retirement Income Exclusion includes the following: interest income; dividend income; net income from rental property; capital gains income; income from royalties; income from pensions and annuities; and no more than $4,000 of an individual’s earned income. Who is eligible for the retirement income exclusion? A taxpayer is eligible for the exclusion if: (i) the taxpayer is 62 years of age or older during any part of the taxable year; or (ii) the taxpayer is permanently and totally disabled. Permanent and total disability is defined as a medically demonstrable disability which is permanent and which renders the taxpayer incapable of performing any gainful occupation within the taxpayer’s competence.

Each taxpayer is entitled to the retirement income exclusion up to the limit in effect for that particular tax year. In the case of a married couple filing jointly, each spouse, if otherwise qualified, is individually entitled to exclude retirement income such that the total amount of exclusion for the couple, if otherwise allowable, may be up to twice the individual exclusion amount.

How much retirement income can a taxpayer exclude? The maximum amount of retirement income for tax years 2003, 2004 and 2005 which may be excluded is $15,000 per taxpayer per year. With a married couple filing jointly, each spouse could exclude up to $15,000 in qualified retirement income or a total of $30,000 on the joint return. For tax year 2006, the exclusion increases to $25,000 per taxpayer. For tax year 2007, the retirement exclusion increases to $30,000 per taxpayer, and beginning in year 2008, the exclusion goes to $35,000 per taxpayer with a potential exclusion of $70,000 on a joint return.

Here is where some tax planning by a couple can produce additional tax savings. If a couple’s stock, interest-bearing accounts and rental income are all titled in the husband’s name or are all titled in the wife’s name, the couple may miss out on a portion of what would otherwise be excludable retirement income. If certain retirement income, for example, is income that is exclusively allocated to the husband, then the taxpayers need to make certain that they balance stocks or investment accounts in the name of the wife as best they can to offset the retirement amounts otherwise allocable exclusively to the husband. Income from property held jointly by the husband and wife will be allocated one-half to each.

Let us look at one example. Assume Bob and Helen are each over 62 years of age and are married to each other. Bob is retired and has a pension of $25,000 per year. Helen is employed as a teacher and makes $44,000 per year. Together they own stocks and interest-bearing accounts that generate $8,000 per year in dividends and interest. They own a condo in Florida that is regularly rented and provides them $9,600 per year in net rental income. How much retirement income are they entitled to exclude in 2003?

The maximum exclusion amount in 2003 is $15,000. Bob can therefore exclude $15,000 of his $25,000 pension. Helen and Bob own their income-producing property jointly so that Helen is entitled to exclude her allocable portion (one-half) of such earnings. Helen can exclude $4,000 in dividends and interest and $4,800 in rental income. She can also exclude $4,000 of her earned income received from teaching for a total exclusion for Helen of $12,800.

With a little planning and the shifting of ownership of some of the stocks, rental property or interest-bearing accounts to Helen’s ownership exclusively, she could qualify for the full $15,000 retirement income exclusion resulting in a total exclusion of $30,000 when combined with Bob’s exclusion.

Assume the identical dollar amount of earnings in 2006, but ownership of stocks, rental property and interest-bearing accounts is solely in Helen. The maximum exclusion amount increases in 2006 to $25,000. Bob’s entire pension of $25,000 is excluded from tax. Helen’s exclusion includes the full $8,000 in dividends and interest, the full $9,600 in rental income plus $4,000 of her earned income for a total exclusion for Helen of $21,600. When coupled with Bob’s exclusion of $25,000, Bob and Helen are able to exclude $46,600 of their $86,800 in otherwise taxable income and are taxable on only $40,000 of Helen’s salary.

This is not a blanket repeal of the individual income tax by the state of Georgia by any stretch of the imagination; however, it is movement in the right direction!

Endnotes:

See O.C.G.A. § 48-7-27(a)(5) and GA Rules and Regulations 560-7-4-.02.