Q. I need your help! I want to retire in Santa Fe! I love the weather, food, etc. My husband thinks we can't afford to retire there because it is more expensive and has a state income tax.

Our home in Dallas would sell in the $350,000 range. I have found a house I love in Santa Fe for around $327,000. We only owe about $90,000 on our home, so we have lots of equity to put down.

Here is his problem---will the money that we would need to pull out of retirement funds be subject to the state income tax? Also, other than the house expense, would it be cheaper (taxes and insurance, etc.) to retire in New Mexico compared to Texas with a home that would be valued at less than $300,000.00? I say our taxes and insurance would be far more expensive here in Texas than there!

---C.M., by e-mail from Dallas, TX


A. Those of us who live in states with no state income tax tend to be excessively proud of our condition. (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no tax.   New Hampshire and Tennessee limit their income tax to dividends and interest income only.)   But taxes not paid in one place are often made up in another.

Texas has no state income tax.   It has a stiff local real estate tax instead. New Mexico has a state income tax that gets your attention (6.8 percent for couples with taxable income over $26,000) but it has a very modest local real estate tax. You can see how things could work out by doing a comparison based on the figures you provided.

Your Texas house probably has an annual real estate tax of $6,600. This assumes a fairly typical 2.2 percent rate on $300,000 in appraised value. (In some areas appraisals are behind market value. In other areas they are now ahead of market value.) A $327,000 house in Santa Fe would pay taxes at a 0.5 percent rate.

That's only $1,635 a year.

So you have a $5,000 a year running start for state income taxes! As a consequence, your taxable income would have to be well over $75,000 before your combined tax bill will be equal to the real estate tax in Texas. Other, but smaller, factors are: home insurance (higher in Texas), auto insurance (higher in New Mexico), and gasoline (higher in New Mexico).

I would be misleading readers, however, if we just compared houses of the same price. You may have found a retirement house you like in Santa Fe for $300,000 but I would bet my next paycheck that it's much smaller house than your house in Texas.

People who live in California can sell a utility shed and use the proceeds to buy a good-sized house in most of Texas, including the major cities. Thousands of nearly new houses are available in Austin, Dallas, Houston, and San Antonio for $100 a square foot or less. In Santa Fe, few houses are available for less than $200 a square foot. As a result, the 3,000 square foot house you sell in Dallas may have to be replaced by a 1,500 square foot house in Santa Fe.

Is that such a big deal? I don't know. It's up to you. Someday archeologists will puzzle over contemporary home standards. What made Americans in the early 21st century think it was necessary to have bathrooms the size of entire early 20th century houses? What drove us to demand closets large enough to be small retail shops? What made empty nest couples seek kitchens with granite countertops large enough to provide emergency landings for F14 fighter aircraft?   Many, many retirees can radically downsize. They will never miss the space.

Retirement moves aren't easy. A good way to start on the economics is to read magazines like "Where to Retire." You can also visit websites that compare different locations for cost, services, and amenities. One such site is www.bestplaces.net. It says that it costs about 14 percent more to live in Santa Fe than in Dallas. Another is www.homefair.com, which will calculate the income you need in another city. Like most broad information tools, there may be big differences between what the calculator says and what you actually experience--- up and down.

On the Web:

Location Cost of Living Tools


Compare State Income Tax rates  

Where To Retire magazine