Learn Which States Are the Best for Retirees
Some places are more tax-friendly than others for retirees. And if you’re living on a fixed income, the less money you spend on taxes, the more you’ll have to enjoy your golden years. To find the most tax-friendly states for retirees, we’ll look at the three main types of state taxes: income tax, property tax, and sales tax.
States Without an Income Tax
There are seven states that do not impose an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In New Hampshire and Tennessee, there is only tax dividend and interest income. While states that lack an income tax may seem like the most attractive option, they may have steep property or sales taxes, which could easily offset the lack of income tax.
State Income Tax Breaks for Retirees
Most states with an income tax allow retirees to exclude some or all of their income from Social Security, pensions, or both. For many retirees, this makes income taxes the least of their worries.
There are nine states that exempt all federal, military, and in-state pensions as well as all Social Security benefits from income tax: Alabama, Hawaii, Illinois, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. Alabama, Hawaii, and Illinois also exempt income from certain types of private pensions.
Pennsylvania and Mississippi are unique in that they are the only states in the country that exempt all retirement income, even IRA, and 401(k) distributions.
There are, however, a few states that are less than hospitable to retirees. Not only are their tax rates high, but they also fully tax pension income. These states and their top tax rates are: California (10.55 percent on income over $1 million), Rhode Island (9.9 percent on all income including capital gains), Vermont (8.95 percent), Connecticut (6.5 percent), and Nebraska (6.84 percent). All of these states, with the exception of California, tax some or all of Social Security benefits.
More information on state income taxes for retirees
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 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., 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. This is because 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 62 who meet income limits can receive a rebate of up to 90 percent of their property taxes.
States With the Lowest Sales Tax
There are only five states that do not have a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Although Alaska does not charge a state sales tax, it does allow cities and counties to impose sales taxes, which range from 1 percent to 7 percent.
Of the states that do charge sales tax, those with the lowest combined state and local tax rates, according to the Tax Foundation, are: Hawaii (4.38 percent), Maine (5.00 percent), Virginia (5.00 percent), Wyoming (5.38 percent), and Wisconsin (5.42 percent).
So, which state is has the best overall tax climate for retired persons? It depends on the type and amount of income you will be bringing in, the value of your home, your cash-on-hand, and any specific tax issues you may have.
For example, if you will have a lot of income or will continue to work part-time after retirement, income taxes may be your first priority. Conversely, if you will be living on Social Security that is exempt in many states, property taxes may be more important. There are some clear front-runners, though. States that have no income tax or exempt pensions and Social Security income, and that 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, among other things. Your financial outlook and what is important to you in a retirement community will determine your unique fit in a retirement destination. You should contact your CPA or financial advisor for more personalized guidance on this topic.