Most and Least Tax-Friendly States for Retirees

How State Taxes on Retirement Income Work

Some states don’t tax retirement income specifically, but do have property, sales, and estate taxes that retirees should take into consideration.

Property Taxes

If you are married and both you and your spouse are listed as co-owners of the property, both of you may benefit from property tax relief programs (such as homestead exemptions or senior exemptions) if both age and residency requirements are met.

After a divorce, the spouse who retains ownership of the home is solely responsible for paying property taxes. If the home is sold, both spouses may need to pay prorated taxes up to the sale, and the remaining spouse may still qualify for tax benefits like senior exemptions if eligible.

Tax-Friendly States for Retirees Looking to Buy New Homes

The following states offer property tax relief benefits for retirees:

• Alabama – At 0.41% the property tax is one of the lowest in the nation. Additionally, homeowners over age 65 are exempt from state property taxes.
• Delaware – 0.59% property tax rate as well as property tax relief programs for seniors in certain counties.
• Wyoming – 0.57% property tax rate and residents over 62 can apply for a property tax refund if their income is below a certain threshold.
• Colorado – 0.51% property tax rate and The Senior Property Tax Exemption allows homeowners over 65 to exempt up to 50% of the first $200,000 of their home’s value from taxation.
• South Carolina – 0.57% property tax and homeowners over 65 can claim a homestead exemption of up to $50,000 of the home’s value from taxation.
• Nevada – 0.64% property tax and seniors with low incomes in certain counties can use property tax deferral programs.
• Mississippi – 0.65% property tax and homeowners over 65 can exempt up to $75,000 of the market value of their home from property taxes.
• Tennessee – 0.71% property tax and come counties offer property tax relief and freeze programs for seniors bases on income limits.
• Florida – Though its 0.82% property tax is higher than in many other states, there are significant benefits for seniors. Homeowners over 65 can apply to receive an additional homestead exemption of up to $50,000 from some city and county governments.
• Arizona – 0.66% property tax and a Senior Property Valuation Protection program, which freezes the property value for tax purposes if certain income limits are met.

States That Don’t Tax Pension Income

The following 17 states don’t tax pension income or offer specific exemptions for pension income, making them attractive to retirees looking to minimize their tax burdens.

1. 1. Alabama
   2. Alaska
   3. Florida
   4. Hawaii
   5. Illinois
   6. Mississippi
   7. Nevada
   8. New Hampshire
   9. Pennsylvania
   10. South Dakota
   11. Tennessee
   12. Texas
   13. Washington
   14. Wyoming
   15. Georgia (for some retirees, with specific age and income limits)
   16. Missouri (with exemptions for certain income levels and age)
   17. North Carolina (with certain federal or state pension exemptions)

State Income Taxes

Income taxes vary widely by state, and some have no state income tax. These states are good options for retirees, as they don’t tax any form of retirement income, such as pensions, Social Security benefits, or withdrawals from retirement accounts like 401(k)s or IRAs.

Sales Taxes

The average combined sales tax rate in the United States, which includes both state and local sales taxes, is approximately 7.65%.

These five states have the highest combined state and local sales tax rates:

1. 1. Louisiana – Average combined rate: 9.55%

• • State rate: 4.45%
  • Local rates make it the highest in the country.

1. 1. Tennessee – Average combined rate: 9.55%

• • State rate: 7.00%
  • Local rates contribute significantly to the overall high rate.

1. 3. Arkansas – Average combined rate: 9.47%

• • State rate: 6.50%
  • Local jurisdictions can levy significant additional taxes.

1. 4. Alabama – Average combined rate: 9.25%

• • State rate: 4.00%
  • Local jurisdictions can levy significant additional taxes.

1. 5. Oklahoma – Average combined rate: 8.98%

• • State rate: 4.50%
  • High local taxes bring the average up.

These six states have the lowest combined state and local sales tax rates, or no sales tax at all:

1. 1. Delaware – 0.00% – No state or local sales tax
   2. Montana – 0.00% – No state sales tax; local-option resort tax in some communities and resort areas
   3. New Hampshire – 0.00% – No state or local sales tax
   4. Oregon – 0.00% – No state or local sales tax
   5. Alaska – 1.76% – No state sales tax, but localities can impose their own taxes
   6. Hawaii – 4.44% – State rate 4.00%, lowest among states with a state-wide sales tax with modest local rates

Estate or Inheritance Taxes

If you plan on leaving anything substantial to your heirs, these 38 states stand out because they do not have estate or inheritance taxes:

1. 1. Alabama
   2. Alaska
   3. Arizona
   4. Arkansas
   5. California
   6. Colorado
   7. Delaware
   8. Florida
   9. Georgia
   10. Idaho
   11. Indiana
   12. Iowa (phasing out its inheritance tax by 2025)
   13. Kansas
   14. Kentucky
   15. Louisiana
   16. Michigan
   17. Mississippi
   18. Missouri
   19. Montana
   20. Nebraska (has inheritance tax but applies to distant heirs, with certain exemptions)
   21. Nevada
   22. New Hampshire (no estate tax, but does have an inheritance tax on specific transfers)
   23. New Mexico
   24. North Carolina
   25. North Dakota
   26. Ohio
   27. Oklahoma
   28. South Carolina
   29. South Dakota
   30. Tennessee
   31. Texas
   32. Utah
   33. Vermont
   34. Virginia
   35. Washington, D.C. (No inheritance tax but has estate tax)
   36. West Virginia
   37. Wisconsin
   38. Wyoming

Most Tax-Friendly States for Retirees

Here are the top 10:

1. Florida: No state income tax, allowing retirees to keep more of their income, including Social Security benefits and retirement account withdrawals.
2. Alaska: Alaska also has no state income tax and provides an annual dividend to residents from oil revenues, making it financially advantageous for retirees.
3. Wyoming: Wyoming has no state income tax and low property taxes, making it a favorable option for retirees looking to minimize their tax burden.
4. South Dakota: South Dakota does not impose a state income tax, and its overall low tax environment benefits retirees significantly.
5. Hawaii: Despite a high living cost, retirees can hang on to more of their income to cover expenses because in some parts of the state, the tax bite is small. Additionally, Social Security benefits escape state taxes, and the property tax rate is low. Quality of life is also a big component of why this state is ideal for retirees.
6. Texas: Texas has no state income tax, providing a tax-friendly environment for retirees with various income sources.
7. Nevada: Nevada also has no state income tax, making it a popular destination for retirees who want to minimize their overall tax liabilities.
8. New Hampshire: New Hampshire does not tax earned income or Social Security benefits, although it does tax dividends and interest, making it appealing for many retirees.
9. North Dakota: North Dakota has a relatively low income-tax rate and does not tax Social Security benefits, which is beneficial for retirees.
10. Montana: While Montana does have a state income tax, it offers various exemptions for retirees, including a partial exemption on Social Security benefits and lower tax rates for pension income.

Least Tax-Friendly States for Retirees

These states made our bottom nine list, due to their higher taxes on retirement income and living expenses.

1. 1. California: High income taxes apply to retirement income, contributing to overall higher living costs.
   2. Connecticut: It has significant taxes on pensions and a high income-tax rate, making it costly for retirees.
   3. Massachusetts: The state taxes both Social Security benefits and pensions, along with elevated property taxes.
   4. Montana: Limited exemptions for retirement income exist, coupled with relatively high tax rates.
   5. New Jersey: Taxes retirement income, including Social Security, which burdens retirees financially.
   6. New York: High state income taxes and property taxes negatively impact retirees’ finances.
   7. Rhode Island: Taxes pensions and has a high cost of living, creating challenges for retirees.
   8. Utah: While it has a lower income tax rate, it still taxes retirement income.
   9. Vermont: Taxes Social Security benefits and pensions, with high property taxes as well.

Will I Owe Income Tax on Social Security Retirement Benefits?

You may owe federal income tax on Social Security retirement benefits if your combined income (adjusted gross income, nontaxable interest, and half of your Social Security benefits) exceeds certain thresholds. Some states also tax Social Security benefits, but most do not.

Standard Tax Rate for 401k Retirement Distributions

With a few exceptions, 401(k) distributions are subject to a mandatory 20% withholding.

Guidance for Minimizing Your Taxable Income in Retirement

Most people are unfamiliar with the tax implications that come from transitioning away from a work paycheck once you retire. An experienced financial advisor can help you minimize your taxable income in retirement based on your individual savings and investments. Register for one of our educational workshops with a financial planner specializing in retirement income tax reductions to learn more.