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New Mexico Retirement Tax Friendliness

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Overview of New Mexico Retirement Tax Friendliness

New Mexico taxes all forms of retirement income, including Social Security, while offering a deduction to seniors with household income below a certain limit. New Mexico’s sales taxes are above average, but its property taxes are among the lowest in the U.S.

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You will pay of New Mexico state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
  • Our Tax Expert

    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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New Mexico Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

There are a lot of great reasons to retire in the Land of Enchantment. It has an arid climate with more than 250 days of sunshine per year. The cost of living in New Mexico is relatively low, with median home values below $150,000 in most parts of the state. It also has nearly 400,000 acres of national park land and more than 10 million acres of national forest land.

On the other hand, retirement taxes in New Mexico may be relatively high for many retirees. The state taxes all forms of retirement income, including Social Security, while offering a deduction to seniors with household income below a certain limit.

New Mexico’s sales taxes are also above average, but its property taxes are among the lowest in the U.S. Below, we will take an in-depth look at these retirement taxes in New Mexico as well as exemptions and exceptions that could help you lower your tax bill.

Is New Mexico tax-friendly for retirees?

New Mexico is moderately tax-friendly for retirees. For seniors (age 65 or older) there is an $8,000 deduction on retirement income if the household Adjusted Gross Income (AGI) is less than $28,500 for single filers or $51,000 for marrieds filing jointly.

New Mexico has some of the lowest property taxes in the U.S., with an average effective rate of 0.76%. Sales taxes are 7.55% on average, but exemptions for food and prescription drugs should help seniors lower their overall sales tax bill.

Is Social Security taxable in New Mexico?

Yes. Social Security retirement benefits are taxable in New Mexico, but they are also partially deductible. The deduction is $2,500 for taxpayers under the age of 65. For persons age 65 and older, the deduction is $8,000. For seniors, the income limits to claim the deduction are $28,500 (of AGI) for single filers or $51,000 for married filers. For non-seniors, the income limits are slightly higher at $36,667 for single filers and $55,000 for married filers.

The deduction can be claimed on all retirement income including Social Security benefits, pension income and retirement account income. If retirement income exceeds the deduction amount, the excess is considered taxable income and taxed at the rates shown in the table below.

Income Tax Brackets

Single Filers
New Mexico Taxable IncomeRate
$0 - $5,5001.70%
$5,500 - $11,0003.20%
$11,000 - $16,0004.70%
$16,000+4.90%
Married, Filing Jointly
New Mexico Taxable IncomeRate
$0 - $8,0001.70%
$8,000 - $16,0003.20%
$16,000 - $24,0004.70%
$24,000+4.90%
Married, Filing Separately
New Mexico Taxable IncomeRate
$0 - $4,0001.70%
$4,000 - $8,0003.20%
$8,000 - $12,0004.70%
$12,000+4.90%
Head of Household
New Mexico Taxable IncomeRate
$0 - $8,0001.70%
$8,000 - $16,0003.20%
$16,000 - $24,0004.70%
$24,000+4.90%

Are other forms of retirement income taxable in New Mexico?

Yes. Retirement income from a pension or from a retirement account such as an IRA or a 401(k) is taxable in New Mexico. As with Social Security these forms of retirement income are deductible. Income in excess of the deduction, which is $8,000 for seniors, is taxed at New Mexico’s income tax rates. These range from 1.7% to 4.9%, as shown in the table above.

Seniors age 65 or older can also claim a refundable medical care credit if they have uncompensated medical care expenses of more than $28,000.

How high are property taxes in New Mexico?

Very low. The state’s average effective property tax rate is 0.76%. In many parts of the state, annual property taxes for most homeowners are less than $1,000.

The biggest exceptions to New Mexico’s generally low property taxes are Bernalillo County and Los Alamos County. Median annual property taxes in these two counties are more than $1,700.

What is the New Mexico 65 or older value freeze?

Seniors in New Mexico with household income below a certain level can apply for a freeze on their home’s assessed value to limit annual increases in property taxes. The income limit is $32,000. Homeowners with modified gross income below that level are eligible for the freeze.

Photo credit: ©iStock.com/JannHuizenga

How high are sales taxes in New Mexico?

Technically, New Mexico does not have sales taxes. The state has a gross receipts tax, which is charged to the business and often passed on, in part or in full, to the consumer.

When comparing this gross receipts tax to the sales taxes in other states, New Mexico’s gross receipts tax is slightly higher than average. The statewide rate is 5.125%, which ranks in the bottom half of all states. However, local governments collect additional taxes of their own, which average 2.43% and can be as high as 3.56%.

A number of exemptions help to limit the overall impact of the gross receipts tax on the budgets of seniors. Most groceries are exempt from the gross receipts tax (though prepared food is not exempt). Prescription drugs are also exempt.

What other New Mexico taxes should I be concerned about?

If you are planning on supplementing your retirement income with earnings from investments, keep in mind that you will pay taxes on all capital gains. New Mexico does provide a deduction equal to 50% of all capital gains income or $1,000 of the net capital gains reported, whichever is larger.

New Mexico does not have an inheritance or estate tax.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration