Learn Which States Are the Most Tax-Friendly for Retirees
Seven states have no income tax and four have no sales tax
Some places are more tax-friendly for retirees than others and if you’re living on a fixed income, the less money you're forced to spend on taxes, the better. We've considered the three main types of state taxes—income tax, property tax, and sales tax—to find the most tax-friendly states if you've retired or you're about to. The map below will help you compare U.S. income tax by state.
States Without an Income Tax
Seven states don't 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 little 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 of them get you in other ways. They might have steep property or sales taxes and this can easily offset the lack of an income tax.
State Income Tax Breaks for Retirees
Most states that do have an income tax allow retirees to exclude from taxation some or all of their Social Security benefits, pension income, or both. This is another consideration that can make income taxes the least of their worries.
In addition to the states that don't impose an income tax, six more exempted federal, military, and in-state pensions as well as all Social Security benefits as of 2017: Illinois, Mississippi, New Hampshire, Pennsylvania, South Dakota, and Tennessee. Illinois also exempts income from certain types of private pensions.
Pennsylvania and Mississippi are unique in that they're the only states in the country that exempt all retirement income, even IRA and 401(k) distributions.
States You Might Want to Steer Clear Of
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 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 taxed, too, if it's taxed at the federal level
- 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.
The Tax Foundation, a nonpartisan tax research group in Washington, D.C., has found that people living in Louisiana, Hawaii, Alabama, the District of Columbia, Delaware, and Mississippi paid the least property taxes compared to home value. Florida, a retirement mecca, came in nearly right in the middle, ranked 24th.
Nevada, another popular retirement destination, gets an honorable mention for property taxes. 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. In addition, those over age 62 who meet income limits can receive a rebate of up to 90 percent of their property taxes.
States With the Lowest Sales Taxes
Only four states don't have a sales tax: Delaware, Montana, New Hampshire, and Oregon. Alaska comes close—it doesn't 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, those with the lowest combined state and local tax rates, according to the Tax Foundation, are:
- Virginia: 5.63 percent
- Maine: 5.5 percent
- Wisconsin: 5.42 percent
- Wyoming: 5.4 percent
- Hawaii: 4.35 percent
- Alaska: 1.76 percent
So which state has the best overall tax climate for retired persons? It depends on the type and amount of income you're bringing in, 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'll be living on Social Security that's exempt in many states, property and sales taxes might be more important.
There are some clear front-runners, though. States that have no income tax or that exempt pensions and Social Security income and also have low property and sales taxes top the list. These states are Alaska, Nevada, Hawaii, Wyoming, Florida, Louisiana, Delaware, and Mississippi.
Keep in mind that 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.