10 MOST TAX-FRIENDLY STATES FOR RETIREES

You may be considering retiring in a new state, either as you near retirement or as you enter your golden years. If it’s the former, then you may want to consider moving to one of the best tax-friendly states for retirees. Also, if you’re attempting to make your retirement fund last as long as possible, this can be a game changer. Of course, there are other considerations to make while looking into a move. When deciding where to go, it’s vital to think about a variety of aspects, such as the weather, the availability of your support system, the standard of the local medical facilities, and so on. Yet among the most important considerations should be the level of taxation imposed on retirees in the various states under consideration.

If tax savings are your primary concern, here is a list of the 10 best states to retire in. Our findings are based on a hypothetical retired couple with a wide variety of income sources including earnings, Social Security, traditional IRAs, Roth IRAs, private pensions, 401(k) plans, interest, dividends, and capital gains, and the amount of state and local taxes they would owe in each state.

Most Tax-Friendly States For Retirees

Retiring to a region with fewer taxes can help retirees’ money last longer in retirement. There is no tax on retirement or Social Security benefits in these states. However, data from Wolters Kluwer Tax & Accounting, the Tax Foundation, and the United States Census shows that they have vastly varying property and sales tax rates, which should also be considered. See if any of these tax shelters interest you as a potential retirement destination. Here are some tax-friendly states for retirees

#1. Florida

Many are familiar with Florida’s pleasant winter climate and beautiful beaches. Yet, the sunshine and warmth of Florida’s climate aren’t the only reasons why retirees love the Sunshine State. Due to the lack of an income tax, pensioners who stay working part-time after retirement can keep more of their money. The state does not require you to report your pension or Social Security payments for tax purposes. Around $2,338 is the state median for property taxes. The combined total of state and municipal sales taxes cannot exceed 6%.

#2. Alaska

The largest and northernmost American state also boasts the most unique tax system in the country. Alaska is unique among the states in that there is neither a state income tax nor a state sales tax. Unfortunately, in order to provide these services, the state imposes heavy property taxes on its citizens. Real estate tax bills typically run homeowners around $3,570 annually. Alaskans who have resided there for at least a year are eligible to receive a dividend from the state’s oil wealth trust fund, which in 2022 amounted to $3,284.

#3. Illinois

Despite having an income tax, Illinois exempts a wide variety of retirement income. When calculating their federal adjusted gross income, retirees can deduct their Social Security and pension income, as well as income from government and military pensions, from their defined benefit plans, IRAs, SEPs, and other retirement accounts. It’s possible that retirees will be subject to further taxes, though. The average annual expense of real estate taxes is $4,800. Retailers typically add an additional sales tax of up to 6.25% to the price of many items, and shoppers often have to pay a separate local sales tax as well.

#4. Idaho

One might not immediately think of Idaho as one of the tax-friendly states for retirees. Although its highest income tax rate of 6% for 2022 is comparatively low, Idaho taxes all forms of income except Social Security and Railroad Retirement payments. Retirees who receive income from a government retirement plan are eligible for a sizable deduction for retirement benefits. Beginning in 2023, taxpayers who have income in excess of $2,500 ($5,000 for joint filers) will be subject to a flat rate of 5.8 percent. After 2023, the cutoff will be increased or decreased every year to account for inflation.

Nevertheless, retirees can find some tax-friendly if they look a little further. Sales taxes, for instance, aren’t terrible. There is a 6% statewide sales tax, however, most municipalities merely tack on an additional 0.02%. At 6.02%, Idaho’s combined state and local tax rate is the 15th lowest in the United States. Even if groceries are subject to state tax, residents can claim a $100 credit per person (or $120 if they are 65 or older; $140 after 2023) to help defray the cost of those levies.

Property owners in Idaho should be pleased when compared to their counterparts in the majority of other states. The median property tax in the state is only $492 per $100,000 of home worth ($250,000 home = $1,230 in tax; $350,000 home = $1,722 in tax), making it the sixth lowest in the USA. Further property tax relief and/or deferral may be available to homeowners 65 and older whose annual income falls below the threshold set by the government.

In addition, Idaho does not impose any kind of tax on estates or inheritances.

#5. Arizona

Social security benefits and up to $2,500 in income from federal and Arizona government retirement plans are free from state income tax in the Grand Canyon State. The state of Arizona does not impose taxes on military pensions. Furthermore, most retirees face comparatively tax-friendly rates in these states. For 2022, there are two tax brackets in force (2.55% and 2.98%), however, in 2023, the rate will be a flat 2.5%.

For our first fictitious retired couple living in Arizona on $250,000, the annual property tax is only about $1,270. Estimated annual property taxes for our second couple, who have a $350,000 home, come to just $1,778. Both of those numbers are much lower than the median for the entire country. In addition, homeowners 65 and older who have lived in their house for at least two years and whose yearly income is less than $43,872 (one owner) or $54,840 (two owners) are eligible to “freeze” the value of their property for real estate tax purposes for three years (multiple owners). (The listed amounts are for the 2023 schedule.) There are additional exemptions from property taxes for retirees.

Yet, the state of Arizona’s income tax rates is higher than the national average. At 8.37%, the total state and local rates are the 11th highest in the United States. Yet, because there is no estate or inheritance tax in the Grand Canyon State, it is a more desirable retirement location for the wealthy elderly.

#6. South Carolina

The Palmetto State offers retirees a lovely assortment of income tax reductions, demonstrating genuine southern friendliness. To begin, there will be no taxes on your Social Security check. In addition, retirees 65 and older can subtract up to $10,000 in retirement income (younger taxpayers can exclude up to $3,000). The additional $15,000 of taxable income that seniors can deduct increases to $30,000 if they file as a married couple. 100% of military pensions will be tax-free for veterans in the 2022 tax year (only a partial exemption was previously allowed). Nevertheless, the highest tax rate is decreasing. In 2022, it was down from 7% to 6.5%. The top rate will then reduce by 0.1% annually until it reaches 6% if projections for general fund receipts improve by at least 5%.

South Carolina’s low property tax rate is another perk for retirees. The average property tax across the state for a home worth $250,000 is only $1,295. For a home that costs $350,000, you’ll only have to pay $1,813 a month. You’ll be paying the seventh-lowest mortgage in the country for a home of that price range. Also, the first $50,000 of a senior citizen’s home’s value is exempt from property taxes. If you’ve been a legal resident of South Carolina for the past year and are at least 65 years old, you may apply.

South Carolina is attractive to wealthy retirees in part because there is no state mortality or inheritance tax there.

However, it’s not all good news. South Carolina has relatively high sales taxes. The state levy is 6%, and municipalities can tack on an additional 3% if they so want. The combined average is significantly higher than normal at 7.44%.

#7. Nevada

For those who would prefer not to risk their retirement funds, Nevada is an excellent choice. One reason for this is that Nevada is one of the tax-friendly states for retirees. You can cash in your retirement accounts and start collecting Social Security without worrying about a hefty tax charge from the state because there is no state income tax. As an added bonus, Nevada has no death or inheritance taxes.

The median property tax rate in Nevada is the third lowest in the United States. Our first fictitious couple may expect to pay about $1,210 per year in property taxes on their $250,000 home if they retire there. To compare, the annual mortgage payment for our second made-up couple, who have a $350,000 property, is just roughly $1,694. But, Nevada does not provide any property tax exemptions for people 65 and older.

Yet, sales tax is an area where Nevada could need some improvement. There is a 6.85% state tax and an additional 1.53% that can be added by the county. This results in an average total state and local sales tax rate of 8.23%, ranking it the 13th highest in the country.

#8. Colorado

The cheap property tax payment in Colorado provides many retirees with a Rocky Mountain high. The average property tax rate in this state is the fourth lowest in the country. It amounts to a projected annual property tax cost of $1,213 for our hypothetical retired couple with a $250,000 home. Rent for our friends’ $350,000 home is a low $1,698 yearly. For eligible retirees, there are additional property tax exemptions, refunds, and deferrals. In addition, certain seniors who do not qualify for a property tax exemption can get a tax credit of up to $1,000 for the 2022 tax year. One of a kind, the property tax “work-off” program allows senior citizens 60 and over to put in some time working for the local government in exchange for a reduction in their property tax bill.

The income tax rate in the Centennial State is also moderate. During the fiscal year 2022, residents of the state will be subject to a flat income tax rate of 4.4%. If annual revenue growth is projected to be too great, the state has the option of lowering the tax rate. For example, 2021’s rate was cut from 4.55% to 4.50% due to strong fiscal year revenue growth. Anybody over the age of 65 can deduct the full amount of federal taxes paid on their Social Security benefits from their Colorado tax return (younger retirees might have to pay Colorado taxes on a portion of their Social Security payments).

Furthermore, Colorado does not have an inheritance or estate tax, which is great news for retirees with significant wealth. That way, more of your wealth will go to your friends and family after you die rather than to the government.

#9. Washington

Your earnings in Washington State will be tax-free. Washington state residents do not have a significant state income tax liability regardless of the amount of money they receive through sources like Social Security, retirement account distributions, pensions, or retirement jobs. Unfortunately, real estate in Washington state is subject to taxation. Property tax bills average $4,061 per year for American homeowners. A 6.5% sales tax is also charged to many transactions.

#10. Hawaii

Don’t let the IRS prevent you from retiring on a tropical island. In contrast to the rest of the United States, Hawaii has one of the smallest state and local tax-friendly for retirees. Only those with very high incomes (above $110,000 per year) will be hit hard by Hawaii’s high-income tax rates (the highest rate is a staggering 11%). (Eleven of Hawaii’s counties have income tax rates that are lower than 11%) The money you receive from Social Security won’t be taken from you in any way by the government. Other forms of retirement income provided by employers (such as traditional pensions and employer contributions to 401(k) plans) are also exempt.

Hawaii has high home prices but a surprisingly low property tax rate. In reality, in terms of a statewide median, California has the nation’s lowest property tax rate (and by a pretty good margin). The predicted yearly property tax costs for our fictitious retiree couple, based on a home value of $250,000, are only $683, and for a home value of $350,000, they are only $956. There may be further property tax reductions available to seniors in Hawaii, depending on where they live.

The sales tax is also quite low. There is a 4% state tax, with an additional 0.5% possible from municipalities. As a whole, state and local taxes average out to 4.44%, making it the sixth lowest rate in the United States. Residents of Hawaii pay more than the low rate indicates because almost everything is subject to taxation. This includes food and clothing.

In addition, estates valued at $5.49 million or more are subject to an estate tax in Hawaii. You should expect to pay between 10% and 20% in taxes.

What Two States Do Not Tax Pensions?

Retirement brings with it the inevitable decision of where to spend the rest of your days. Taxes are a major factor to think about when comparing the cost of living in various locations. The taxation of retirement funds, such as 401(k) and IRA withdrawals, pension payments, and annuity payouts, varies by state. Also, read STATES WITH LOWEST PROPERTY TAXES: Why States Allow Low Taxes on Property.

In addition to the aforementioned tax-free states, here are the two states that do not tax pensions.

#1. Pennsylvania

The standard personal income tax rate in Pennsylvania is 3.07 percent. Assuming the necessary conditions are met, residents of Pennsylvania will not be required to pay taxes on their retirement income. If you cash out your IRA before you turn 59 1/2, you may owe taxes on the money you withdrew.

#2. Illinois

While residents of Illinois are subject to a flat state income tax rate of 4.95 percent, retirees are exempt from paying taxes on their retirement funds. This consists of retirement income in the form of pensions and 401(k)/IRA withdrawals. Pensions from the Social Security Administration are likewise not taxable.

What Are the 3 States That Don’t Tax Retirement Income?

While making long-term financial plans, it’s crucial to factor in how your state of residence taxes retirement income. When it comes to retirement funds, some states don’t tax anything, while others treat distributions from IRAs and 401(k)s, pension payouts, and even Social Security checks as regular income and impose taxes accordingly. However, income taxes only tell part of the story; while having minimal or no income taxes themselves, some states have very high property, sales, and other taxes. If you want to be sure you don’t pay any extra taxes in retirement, you might want to consult a financial expert. Here are the top 3 states that don’t tax retirement income.

#1. Iowa

A retiree in Iowa can keep all of their Social Security benefits and receive a tax break on their other retirement income. In addition, it is one of the few states that impose a tax on inheritances. The state of Iowa also has above-average property tax rates.

While there may not be any beaches with turquoise water and white sand, Iowa still has much to offer retirees. Smaller towns like Ames and Dubuque have a low cost of living and calm streets, but larger cities like Des Moines and Cedar Rapids have culture and great food. So, how is Iowa’s tax climate?

All Social Security benefits are tax-friendly in Iowa, and retirees can also take a deduction on other forms of income. But it’s one of the few places that actually taxes inheritances. It also has higher-than-average property taxes. Planning for retirement and other long-term financial goals is easier with the assistance of a financial counselor.

#2. South Dakota

South Dakota has no personal income tax. Pensions, Social Security, and other forms of retirement income are not taxable. It has one of the lowest sales tax rates in the country, and while property tax rates are on the higher end, they are still manageable for low-income retirees.

South Dakota is a fantastic option if you are concerned about taxes in retirement and are considering a move. The state’s tax structure is one of the best in the country for retirees. There is no personal income tax, minimal sales tax, high property tax, and zero transfer taxes.

South Dakota has normal cost-of-living rates. Moreover, in many regions of the state, seniors can cover the basic cost of living on the average Social Security income alone. Of again, retirees who aren’t fond of the cold might not enjoy living in South Dakota. January highs in Sioux Falls typically hover around 26 degrees Fahrenheit.

South Dakota is among the most tax-friendly states in the country for retirees. Retirement income such as Social Security, pensions, and annuities are not subject to taxation in this state because there is no state income tax. In addition, sales taxes are relatively low.

#3. Pennsylvania

All retirement income, including Social Security and distributions from 401(k)s and IRAs, are completely excluded in Pennsylvania. In addition, pension income for those 60 and up is not taxed. It has higher-than-average property tax rates but one of the lowest average total sales tax rates in the country, ranking in the top 20.

Pennsylvania may be an exception to the rule that the Northeast is not a good place to retire due to its high cost of living and pricey taxes. Although the cost of living in the greater Philadelphia area is higher than the national average, the rest of the state is very inexpensive.

Taxes on retirement income are likewise quite low in Pennsylvania. Every retirement and Social Security income is completely exempt from state taxes. Pension income for those above the age of 60 is also excluded. In spite of the relatively high property tax rates, the overall sales tax rate is only 6.17%.

For those above the age of 60, all retirement income is tax-free in Pennsylvania. As a result, you could save a significant amount of money each year, especially when compared to the rest of the surrounding states. The sales tax rate is likewise quite low.

In a few key respects, Pennsylvania is not as tax-friendly for retirees as other states: Apart from the usual property tax burden, there is also an inheritance tax.

What States to Avoid When Retiring?

The pace of life tends to slow down as people retire. We won’t have to worry about meeting deadlines, engaging in office politics, or scraping by in a city with a soul-crushing commute and a punitive cost of living anymore. When your profession comes to an end, you no longer have any ties to a certain area, which brings up problems regarding where and how to spend your time.

Here are some states to avoid when retiring.

Connecticut
Alabama
Arkansas
Maine
Kansas

Conclusion

Ten of the states give complete exemptions and are tax-friendly for retirees from state taxes on retirement income, while many more provide partial exemptions. Research the state’s tax policies thoroughly before making a final decision to move there. Nevertheless, reducing your tax liability isn’t the only thing to think about if you want to retire comfortably.

FAQs

What is the cheapest state to retire in?

What follows is a list of the seven states where retiring is the cheapest available.

Tennessee
Missouri
Mississippi
Kentucky
Oklahoma
Georgia
Michigan

Where can I retire to avoid taxes?

Moreover, the sales, property, estate, and inheritance tax rates in these states are among the lowest in the country.

Alaska.
Florida
Georgia.
Mississippi.
Nevada.