Learn Which States Are the Most Tax-Friendly for Retirees
Seven States Have No Income Tax and Our Have No Sales Tax
Some places are more tax-friendly for retirees than others. If you are living on a fixed income, the less money you are taxed, the better. We have considered the three main types of state taxes—income tax, property tax, and sales tax—to find the most tax-friendly states if you are retired or you are about to retire. The map below will help you compare U.S. income tax by state.
States Without Income Tax
Seven states do not impose an income tax as of 2018: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividend and interest income, so you can hold down a side job in these two states without it costing you in taxes.
States that lack an income tax might seem like an attractive option, but many collect revenues in other ways. They might have steep property or sales taxes, which can easily offset the lack of an income tax.
State Income Tax Breaks For Retirees
Most states that have an income tax also allow retirees to exclude from taxation some or all of their Social Security benefits and pension income.
According to Retirement Living Information Center, "States that exempt pension income entirely for qualified retirees are Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming."
The Center also lists states that exempt or provide a credit for a portion of pension income. These are Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, and Wisconsin.
States You Might Want to Avoid
There are, however, a few states that are less than hospitable to retirees. Not only are some of their tax rates high, but they also fully tax pension income. These states and their top tax rates as of 2018, according to the Tax Foundation, a nonpartisan tax research group in Washington, D.C., are:
- California: 13.3 percent on income over $1 million, although Social Security is exempt
- Minnesota: 9.85 percent on income over $160,020
- Vermont: 8.95 percent on income over $416,650, and Social Security income is also taxed
- Idaho: 7.4 percent on income over $11,043
- Connecticut: 6.99 percent on income over $500,000
- Nebraska: 6.84 percent on income over $30,420 and it does not exempt Social Security income
- West Virginia: 6.5 percent on income over $60,000
- Rhode Island: 5.99 percent on income over $149,150
- Kansas: 5.7 percent on income over $30,000
- North Carolina: 5.499 percent on all income
- Massachusetts: 5.1 percent on all income
- Arizona: 4.54 percent on income over $155,159
- Indiana: 3.23 percent of your federal adjusted gross income
- North Dakota: 2.9 percent on income over $424,950
Even if you earn a relatively modest income in California, the state will tax you at 8 percent as of 2018—one of the highest rates in the country—on income over $42,711.
Property Tax Relief
Property taxes can be especially difficult for retirees with low incomes and high housing costs. Fortunately, all 50 states offer some type of property tax relief program.
Forty states provide homestead exemptions that reduce the assessed value of your home or property tax credits that will reduce your tax bill directly. Most states also have special exemptions for senior residents over a certain age and who meet income requirements.
According to Tax-Rates.org, people living in Louisiana, Hawaii, Alabama, Delaware, the District of Columbia, and West Virginia paid the least property taxes compared to their home's value. Notably, Nevada’s property tax is based on a mere 35 percent of the fair market value of the property while most states use 100 percent of fair market value.
States With the Lowest Sales Taxes
Only four states do not have a sales tax: Delaware, Montana, New Hampshire, and Oregon. Alaska comes close—it does not charge a state sales tax, but it does allow cities and counties to impose sales taxes, and they range from 1 percent to 7.5 percent.
Of the states that do charge a sales tax, the five states with the lowest combined state and local tax rates as of 2018, according to the Tax Foundation, are Louisiana (10.02 percent), Tennessee (9.46 percent), Arkansas (9.41 percent), Washington (9.18 percent), and Alabama (9.10 percent).
So which state has the best overall tax climate for retired persons? It depends on the type and amount of your income, the value of your home, your cash on hand, and any specific tax issues you might have.
If you expect to have a lot of income or will continue to work part time after retirement, income taxes might be your first priority. If you will be living on Social Security that is exempt in many states, property and sales taxes might be more of a concern.
However, there are some states that show clear advantages. These include states that have no income tax or that exempt pensions and Social Security income and states that also have low property and sales taxes. These states are Alaska, Delaware, Florida, Hawaii, Louisiana, Mississippi, Nevada, and Wyoming.
This list is for general use and does not take into account climate, access to quality medical care, or cost of living. Your financial outlook and what's important to you in a retirement community will determine your unique fit in a retirement destination. Contact your CPA or financial advisor for more personalized guidance on this topic.