Transcript

Introduction: Why Retirement Taxes Matter for Mississippi Public Employees

If you are a Mississippi public employee getting ready to retire, one of the biggest questions on your mind is probably taxes. Many retirees assume their tax burden will stay roughly the same or drop slightly in retirement. But because Mississippi is one of the most tax-friendly states in the country for retirees, the drop can be quite significant.

What to Expect in This Video

By the end of this video, you will understand how your federal, state, and local taxes change when you transition from active service into retirement including how state income tax can drop to zero for your PERS pension, deferred comp and 403(b) distributions, how federal payroll taxes can disappear, and how local property tax exemptions kick in when you reach key age thresholds. 

And be sure to watch to the end to find out just how much taxes drop in retirement for a single PERS member making $100,000 and a married PERS couple making $200,000.

Offer for Personalized Tax Estimate

As you watch this video, keep in mind that these figures are for illustrative and educational purposes only and are not to be used as personalized tax or financial advice. However, I'm a financial planner and firm owner by day, so if you want to explore your own personalized tax estimate based on your unique circumstances, you can start the conversation by scheduling an introduction with me using the link in the show notes below.

Overview of Taxing Jurisdictions, Authorities Involved, and Examples of Taxes

Let's start with an overview of who can tax you and what they can tax you on.

As a Mississippi resident, your tax burden comes from three distinct levels of government: federal, state, and local.

• Federal jurisdiction: the Internal Revenue Service and Social Security Administration govern federal income tax, federal payroll tax, federal estate tax, and federal gift tax.

• State jurisdiction: The Mississippi Department of Revenue oversees state income tax, state sales tax, and state excise tax.

• Local jurisdiction: Your local county, municipal government, and school district will request and/or assess real estate ad valorem taxes, annual vehicle tag fees, and optional local sales and tourism taxes. 

When you retire from public service, every single one of these jurisdictions sees shifts in how and how much they tax you.

Federal Tax Changes Pre vs. Post-Retirement

Let's start our analysis by looking at how federal taxes change as you transition from employee to retiree with retirement income coming from sources like PERS pension benefits, deferred comp 457(b) accounts, tax-sheltered annuity 403(b) accounts, and Social Security. 

The most immediate federal relief for a retiree is the total elimination of FICA payroll taxes. As an employee, you generally pay taxes on 7.65% of your FICA wages.

6.2% goes towards Social Security, and 1.45% goes towards Medicare.  There is a limit on FICA wages for Social Security tax purposes, and some high earners will also have to pay an additional 0.9% tax on Medicare wages. 

Contrast those rates with retirement where your PERS pension income, deferred comp withdrawals, and 403(b) withdrawals and Social Security income are completely exempt from Social Security or Medicare payroll taxes. 

Another area of potential federal relief for a retiree is in the federal income taxes they pay.  Although withdrawals from traditional deferred comp and 403(b) plans, along with your PERS pension benefits, are taxed at standard federal income tax rates, at least 15%, and in some cases up to 100% of your Social Security benefits may be excluded from federal income taxes. 

Retirees will not see any relief, all else being equal, from federal capital gains or federal gift and estate taxes in retirement compared to while working.  However, if a retiree's adjusted gross income or AGI falls in retirement, there may be opportunities to take advantage of lower taxes on capital gains and qualified dividends.

Mississippi State Tax Changes Pre vs. Post-Retirement

Next, let's look at how state taxes change as you transition from employee to retiree, with retirement income coming from sources like PERS, deferred comp, 403(b), and Social Security. 

The most immediate state tax relief for a retiree is the total elimination of state income taxes. As an employee, you generally pay state income tax at a flat rate of 4% of your taxable income over $10,000. 

Contrast that with retirement, where your qualified retirement income from PERS pension, deferred comp withdrawals, 403(b) withdrawals, and Social Security income is completely excluded from state income tax. Just be sure, though, that you've met the requirements in the retirement plan for that distribution to be qualified retirement income.

Retirees will not see any relief from state sales taxes or state excise taxes in retirement compared to while working, assuming the retiree maintains a constant spending pattern. And unlike at the federal level, there is no state gift or estate tax while working or in retirement.

Local Tax Changes Pre vs. Post-Retirement

Finally, let's look at how local taxes change as you transition from employee to retiree, specifically real estate ad valorem taxes and vehicle ad valorem taxes.

The largest local tax relief for a retiree is the senior homestead exemption for real estate property taxes. Once you reach age 65, you can file an over 65 homestead exemption, which exempts county and municipal ad valorem property taxes on the first $75,000 of your home's true value or $7,500 of your home's assessed value. 

Retirees will not see any relief, all else being equal, from vehicle property taxes in retirement compared to while working.  Retirees will not see any relief from local sales or tourism taxes in retirement compared to while working, assuming the retiree maintains a constant spending pattern.

Hypothetical Case Study Assumptions (Single $100K Household and Married $200K Household)

To see how federal, state, and local tax breaks work together for retirees, let's look at two hypothetical case studies comparing tax bills before retirement, after retirement but under age 65, and after retirement and over age 65. We are going to look at both a single household and married household.

While working and just before retiring, our single PERS member makes $100,000, and our married PERS couple makes $200,000. All household members worked 30 years in public service for the state of Mississippi and retired at age 57 from PERS.

As far as houses go, we assume that the single retiree's primary residence has an appraised or true value of $300,000, and the married couple's primary residence has an appraised or true value of $500,000. Local real estate taxes are modeled using an average Mississippi millage rate of 100 mills.  In making our calculations, we assume our retirees qualify for the standard $300 homestead credit before age 65, and upon reaching age 65, our retirees qualify for the over 65 homestead exemption. 

As far as vehicles go, we assume that the single retiree has one vehicle assessed at $30,000, and the married couple has two vehicles assessed at a combined $70,000. Annual tag taxes are calculated assuming the same local millage rate of 100 mills.  We are assuming our retirees qualify for the legislative car tag credit, which is assumed to be 6% in this analysis. 

Lastly, we are assuming that several taxes will not change materially in retirement, including sales taxes, excise taxes, and tourism taxes. We also are assuming that our retirees will not have any capital gains or gifts subject to federal or state taxes.

Hypothetical Case Study Example: Single PERS Retiree w/$100K Household Income

With those assumptions out of the way, let's start first by looking at the taxes our single PERS member will experience immediately before and after retirement, as well as what happens when they turn age 65. 

You can see in the table that pre-retirement, our single PERS member has 15% of their income deferred to retirement as a result of the PERS and deferred contributions.  Our single PERS member after accounting for the standard deduction will pay $9,870 in federal income taxes. They will also pay payroll taxes of $7,650. 

In addition to federal income and payroll tax, our single PERS member will also pay state income taxes of $2,668 after accounting for the standard deduction and personal exemption and excluding the first $10,000 of taxable income.

As far as real estate property taxes, our single PERS member with a home that has a true value of $300,000 and local millage rate of 100 will pay $2,700 in local ad valorem property taxes after accounting for the standard homestead exemption. 

And finally, our single PERS member with a car that has an assessed value of $30,000 and local millage rate of 100 will pay $842 in vehicle ad valorem taxes after accounting for the legislative car tag credit.

This results in our single PERS member with $100,000 income while working, paying $23,730 in combined taxes to federal, state, and local authorities, excluding any additional sales, excise, and tourism taxes that may apply. 

The next column shows how these taxes change immediately after retirement when our single PERS retiree is 57 years old with the same $100,000 of income.

The first thing to point out is that $62,500 of the income is now coming from PERS pension and $37,500 of the income is now coming from deferred compensation distributions. Since 100% of that income is now taxable for federal income tax purposes, you see the federal income taxes actually increase by several thousand dollars. 

However, our single PERS retiree gets two big tax breaks.  First, they no longer have to pay the FICA taxes on their income, since 100% of the income is coming from qualified retirement plans. Second, they no longer have to pay state income taxes since qualified retirement income in Mississippi is excluded from taxable income. These two tax breaks total over $10,000 for our single PERS retiree. 

The taxes that stay the same immediately after retirement are the home and vehicle taxes, assuming the assessed values do not change.  In practice, the assessed values will change over time, with existing homes historically increasing and existing cars historically decreasing in value. 

Overall, you can see our single PERS retiree will pay approximately $7,000 less in combined taxes early in retirement. 

The last column shows how these taxes change once our single PERS retiree hits 65 years old with the same $100,000 of income.

The first thing to point out is that $20,000 of the income is now coming from Social Security, and the amount now coming from deferred compensation distributions drops from $37,500 to $17,500. Only up to 85% of the Social Security income is subject to federal income taxes, so you see a slight tax break of a couple thousand dollars in federal income taxes. Another thing contributing to the lower federal income tax is the additional deduction for seniors over 65.  However, in this case, since our single PERS retiree makes more than the $75,000 of adjusted gross income threshold, the $6,000 deduction is phased out and they receive a reduced deduction. 

Just as before, at age 57, our single PERS retiree gets to keep two big tax breaks. First, they still no longer have to pay the FICA taxes on their income, since 100% of the income is coming from qualified retirement plans or Social Security.  Second, they no longer have to pay state income taxes since qualified retirement income and social security income in Mississippi is excluded from taxable income. These two tax breaks still total over $10,000 for our single PERS retiree. 

Another tax break that our single PERS retiree gets after turning 65 is with their local property taxes on their home. In Mississippi, for those that properly file a senior homestead exemption, they get to exclude $75,000 of true value or $7,500 of assessed value from the ad valorem calculation. At 100 mills this translates into a $750 senior homestead credit. Keep in mind that they lose the standard $300 homestead credit, so our single PERS retiree only pays a net $2,250 in property taxes rather than the $2,700 in property taxes as before they turned 65.

Unfortunately, there is no senior credit for car taxes like real estate taxes, so the car taxes will remain the same at age 65. 

Overall, you can see our single PERS retiree, after turning 65, will pay approximately $9,600 less in taxes compared to while they were working, and will pay approximately $2,600 less in taxes compared to when they retired, but under 65. 

Hypothetical Case Study Example: Married PERS Retirees w/$200K Household Income

Let's move on to our married PERS couple.

You can see in the table that before retiring, our PERS couple was contributing 9% to PERS and 6% to deferred comp. Combined, this 15% of income is not subject to federal or state income taxes and is deferred until retirement. 

Our married PERS couple, after accounting for the standard deduction, will pay $19,740 in federal income taxes.  They will also pay payroll taxes of $15,300. 

In addition to federal income tax and payroll tax, our married PERS couple will also pay state income taxes of $5,336 after accounting for the standard deduction and personal exemption for married couples and excluding the first $20,000 of taxable income, as the state allows $10,000 exclusion for each spouse.

As far as real estate property taxes go, our married PERS couple whose home has a true value of $500,000 and has a local millage rate of 100 mills will pay $4,700 in local ad valorem property taxes after accounting for the standard homestead exemption. 

And finally, our married PERS couple with two cars that have a combined assessed value of $70,000 and have a local millage rate of 100 will pay $1,964 in vehicle ad valorem taxes after accounting for the legislative car tag credit.

This results in our married PERS couple making $200,000 while working, paying $47,040 in combined taxes to federal, state, and local authorities, excluding any additional sales, excise, and tourism taxes. 

The next column shows how these taxes change immediately after retirement when our married PERS retirees are 57 years old with the same $200,000 of income. 

The first thing to point out is that $125,000 of the income is now coming from PERS pension and $75,000 of the income is now coming from deferred compensation distributions. Since 100% of that income is now taxable for federal income tax purposes, you see the federal income taxes actually increase by over $5,000. 

However, our married PERS retirees get two big tax breaks, just like our single retiree. First, they no longer have to pay the FICA taxes on their incomes, since 100% of the income is coming from qualified retirement plans. Second, they no longer have to pay state income taxes since qualified retirement income in Mississippi is excluded from taxable income. These two tax breaks total over $20,000 for our married PERS retirees. 

The taxes that stay the same immediately after retirement are the home and vehicle taxes, assuming the assessed values do not change. 

Overall, you can see our married PERS retirees will pay approximately $14,000 less in taxes immediately after retiring.

The last column shows how these taxes change once our married PERS retirees hit 65 years old with the same $200,000 of income. 

The first thing to point out is that $40,000 of the income is now coming from Social Security, and the amount now coming from deferred compensation distributions drops from $75,000 to $35,000. Only up to 85% of the Social Security income is subject to federal income taxes, so you see a slight tax break of a couple thousand dollars in federal income taxes once our married PERS retirees hit 65. Another thing contributing to the lower federal income taxes, just like our single retiree, is the additional deduction for seniors over 65. However, in this case, since our married couple makes more than $150,000 of adjusted gross income, the $6,000 deduction per spouse is phased out and they receive a reduced deduction. 

Just as before at age 57, our married PERS retirees get to keep two big tax breaks.  First, they still no longer have to pay the FICA taxes on their income since 100% of their income is coming from either qualified retirement plans or Social Security. Second, they no longer have to pay state income taxes since qualified retirement income and Social Security income in Mississippi is excluded from taxable income. These two tax breaks still total over $20,000 for our married PERS retirees. 

Another tax break that our married PERS retirees get after turning 65 is with local property taxes on their home. In Mississippi, for those that file a senior homestead exemption, they get to exclude $75,000 of true value or $7,500 of assessed value from the ad valorem tax calculation, whether they are single or married. At 100 mills this translates into a $750 senior homestead credit. Keep in mind that they lose the standard $300 homestead credit, so our married PERS retirees only pay a net $4,250 in property taxes rather than the $4,700 in property taxes before they turn 65. 

The car taxes will remain the same at age 65.

Overall, you can see our married PERS retirees will pay approximately $18,000 less in taxes compared to when they were working, and will pay approximately $4,100 less in taxes compared to when they were retired but under age 65.

Action Items for PERS Members: Maximize Tax Benefits

If you are a Mississippi PERS member evaluating how your overall tax picture will change in retirement, here are your action items for today:

1. Maximize state qualified retirement income. Take advantage of Mississippi's exclusion on qualified retirement income by making absolutely sure your withdrawals are indeed qualified retirement income and not early retirement distributions that would be subject to state income taxes. 

2. Be aware of important tax triggers.  Coordinate your deferred Comp 457 and 403(b) distributions with your PERS pension, and Social Security claiming dates to avoid pushing your federal income tax into higher brackets that would trigger higher Medicare premiums, loss of additional senior tax deductions, loss of premium tax credits for health insurance, additional taxes on net investment income, or additional Social Security income becoming subject to federal income taxes. 

3. Mark your calendar.  When you turn 65, contact your county tax assessor's office between January 1st and April 1st to file your senior homestead exemption.

Preview of Next Video and Closing Remarks

I hope this video gives you a clear picture of how dramatically your overall tax burden can decrease when you retire as a Mississippi public employee. In our next video, we will explore “How much will health insurance premiums change in retirement?”

Please make sure you subscribe so you don't miss this and other upcoming videos in our late career series.  If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. 

And finally, if you're looking for a financial planner who specializes in helping Mississippi public employees build tax-efficient retirement strategies, including optimizing pension income, Social Security income, deferred Comp 457(b) distributions, and tax-sheltered annuity 403(b) distributions, please visit our website at perspro.ms to learn more about how we help PERS members like you. 

Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Legal Disclaimer

Disclaimer, this video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.