When Bob Lockhart retired as a congressional staff member last year after a long government career, he and his wife, Barbara, sold their house in Annandale and moved to Dennis, Mass.

Cape Cod is lovely, Lockhart noted last week, and his taxes are a lot lower than they would be in Virginia.

Lower taxes? In "Taxachusetts"?

Hard though it may be to believe, the Lockharts' tax burden is indeed lower in Massachusetts than in Virginia, and their situation illustrates why workers in general, and government workers in particular, should look at all the fine print when considering a place to live in retirement.

Taxes, of course, are hardly the only factor in choosing where to retire, but neither should they be dismissed. As Lockhart said, "we didn't move just for those" tax considerations, but the pension exemption "is a tremendous benefit."

Massachusetts, like about a dozen other states, levies no income tax on pensions of retired government workers. A few states have made that exemption for many years, but most are the result of a court ruling 10 years ago that prohibits states from treating pensions of their own retired workers more favorably than those of retired federal employees.

A decade ago, when a suit brought by federal retiree Paul Davis against the state of Michigan was decided, 24 states treated their own pensioners better than federal retirees. Many, especially those like Virginia, with large populations of federal retirees, dropped their preference for state retirees. But others decided to exempt the federal retirees along with their own.

There are also nine states with no general income tax (though some tax certain kinds of income), and tax-sensitive retirees have long looked to those. Nevada, with no state income tax, has become a haven for California retirees--so much so that California's efforts to tax departed retirees' pensions prompted Nevada's congressional delegation to push through a federal ban on pension "source taxation."

But at the 10th anniversary of the Davis case, federal retirees have an even broader range of low-tax states to choose from, according to data compiled by the Alexandria-based National Association of Retired Federal Employees (NARFE), and this group includes some, such as New York and Massachusetts, not normally thought of as tax havens.

Getting the best tax deal, though, isn't as easy as simply looking at a list of states. Retirees need to analyze their own situations carefully to see how they will be treated in different states.

Besides the tax treatment of pensions, consider how a state treats non-pension income--whether it is taxed, and how heavily. Property taxes are also a factor, and not just taxes on real estate. Florida, for example, has no income tax, but it taxes "intangible" property, such as stocks and bonds. The rate is not stiff, but someone with a large investment portfolio could get a nasty surprise.

The Lockharts did the analysis and found that Massachusetts worked very well for them, even though it taxes unearned income--interest, dividends and the like--at a whopping 12 percent, and other income at 6 percent, compared with Virginia's top rate of 5.75 percent.

"Right now my retirement annuity is a substantial portion of my income; while most of it is taxable for federal income tax purposes, it's totally exempt from Massachusetts income tax," Bob Lockhart said.

He said property taxes on their home are lower than they were in Annandale, though he estimates that the value of the houses is approximately the same.

"Maybe Massachusetts has been getting a bad rap all these years," he said, laughing.

In the era of two-income families, the exemption is even better if both spouses worked for the government. On the other hand, if one spouse worked in the private sector, the analysis gets more complicated.

Many states exempt a portion of all pensions or have extra deductions and exemptions for senior citizens. Such benefits, if combined with a lower tax rate on private pensions and non-pension income, may more than offset an exemption for a government pension.

Other taxes should also be taken into account. Does the state have a sales tax, and are there local add-ons where you're thinking of living? If there is a sales tax, what does it apply to? Many states exempt food and prescription drugs, a great benefit to many retirees.

And keep up to date. States continue to alter their treatment of pensions and taxes generally. North Carolina, for example, stopped taxing federal pensions beginning last year for retirees who had at least five years' government service before Jan. 1, 1998. Kentucky will tax a portion of pensions of government workers who retire after Jan. 1, 1998.

NARFE and other groups can be helpful on this because they make it their business to track these issues.

Above all, keep things in perspective.

The best approach, according to many experts, is to start planning early and compile a list of places where you think you'd like to live. You can then use factors such as taxes and the cost of living to winnow your list.

Remember, low taxes put more money in your pocket, but that is cold comfort if you find you've moved to a place that has a crummy climate or horrendous traffic or is simply too far from your family and friends.

IRS Corrections

The Internal Revenue Service announced a couple of corrections last week.

First, the agency said it was wrong when it said last month that taxpayers who converted a traditional individual retirement account to a Roth IRA last year, and then found they were ineligible to do so, had only until April 15 to undo the conversion. Failure to meet that deadline would mean converted amounts would be considered a distribution, subject to taxes and perhaps penalties.

After reviewing its own rules, the IRS now says taxpayers have until Oct. 15 to undo the conversion. Taxpayers will need to contact the custodian of their account to get the transaction reversed. If they have filed their 1998 return, they will also have to file an amended return. Taxpayers have three years in which to amend, but since conversions generally mean additional taxes paid, there is an incentive to file early and get those taxes back.

Second, the agency disclosed that US Audiotex, a contractor processing credit card tax payments, mistakenly coded 13,700 payments made on April 15 as estimated payments for 1999 taxes rather than actual tax payments for 1998.

As a result, some taxpayers who thought they had paid have been getting "balance due" notices from the IRS. The agency said the error is being fixed and affected taxpayers need do nothing. US Audiotex said it is setting up an automated phone system to call affected taxpayers, and they in turn can get more information by calling the company toll-free at 1-877-754-4413.

CAPTION: STATES AND TAXES (This graphic was not available)