New Mexico Retirement Tax Friendliness

New Mexico Retirement Taxes

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 a median home value of $216,000. 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.

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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, $51,000 for married people filing jointly and $25,500 for married taxpayers filing separately.

New Mexico has some of the lowest property taxes in the U.S., with an average effective rate of 0.74%. Sales taxes are 7.25% on average, with the state rate at 4.875%, but exemptions for food and prescription drugs should help seniors lower their overall sales tax bill.

Is Social Security taxable in New Mexico?

Social Security retirement benefits are taxable in New Mexico, but they are also partially deductible. The exemption 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 be eligible for the exemption 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 exemption can be applied to 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.

Are other forms of retirement income taxable in New Mexico?

Retirement income from a pension or 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 5.9%, as shown in the table above.

Seniors age 65 or older can also claim a refundable medical care credit of $2,800 if they have uncompensated medical care expenses of more than $28,000.

How high are property taxes in New Mexico?

New Mexico’s average effective property tax rate is 0.74%, which is fairly low. In many parts of the state, annual property taxes for homeowners equal less than $1,588.

The biggest exceptions to New Mexico’s generally low property taxes are Bernalillo County and Los Alamos County. Median annual property taxes in each of these two counties are more than $1,800.

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 $41,900. Homeowners with modified gross income below that level are eligible for the freeze.

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 comes in slightly higher than average. The statewide rate is 4.875%, which ranks in the bottom half of all states. However, local governments collect additional taxes of their own, which average 2.38%, but can be as high as 8.81%.

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.