The majority of people who save for retirement frequently concentrate on their investment returns and the amount of money they are setting aside. These are undoubtedly crucial elements to consider when making plans for a comfortable retirement.
However, taxes are another crucial—and frequently disregarded—factor that is equally significant. Different states tax retirement, pension and Social Security income differently. Significant variations exist between state and local assessments of sales and use taxes and property taxes, particularly with regard to residential real estate.
Your retirement finances could be significantly impacted by these tax differences, particularly in terms of how long your retirement nest egg lasts. Therefore, it’s a good idea to investigate state tax laws before choosing a retirement community.
Retirement is a time to relax and enjoy the fruits of your labor. However, taxes can take a significant bite out of your retirement savings. Fortunately, some states offer tax breaks for retirees, including exempting certain types of retirement income from state income tax.
This guide will explore which states don’t tax retirement income and how these tax breaks can benefit you. We’ll also provide tips on how to choose the best state for your retirement based on your individual circumstances.
States with no income tax
The following states do not have a state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
These states offer significant tax savings for retirees, as they will not have to pay state income tax on their Social Security benefits, pensions, or withdrawals from retirement accounts.
States that exempt certain types of retirement income
In addition to the states with no income tax, there are several other states that exempt certain types of retirement income from state income tax. These states include:
- Alabama: Exempts Social Security benefits and some public pensions.
- Arkansas: Exempts Social Security benefits and some public pensions.
- Colorado: Exempts Social Security benefits and some public pensions.
- Delaware: Exempts Social Security benefits and some public pensions.
- Georgia: Exempts Social Security benefits and some public pensions.
- Hawaii: Exempts some public pensions.
- Iowa: Exempts Social Security benefits and some public pensions.
- Kentucky: Exempts Social Security benefits and some public pensions.
- Louisiana: Exempts Social Security benefits and some public pensions.
- Maine: Exempts Social Security benefits and some public pensions.
- Maryland: Exempts Social Security benefits and some public pensions.
- Michigan: Exempts Social Security benefits and some public pensions.
- Missouri: Exempts Social Security benefits and some public pensions.
- Montana: Exempts Social Security benefits and some public pensions.
- New Jersey: Exempts Social Security benefits and some public pensions.
- New Mexico: Exempts Social Security benefits and some public pensions.
- New York: Exempts Social Security benefits and some public pensions.
- Ohio: Exempts Social Security benefits and some public pensions.
- Oklahoma: Exempts Social Security benefits and some public pensions.
- Oregon: Exempts Social Security benefits and some public pensions.
- Rhode Island: Exempts Social Security benefits and some public pensions.
- South Carolina: Exempts Social Security benefits and some public pensions.
- Utah: Exempts Social Security benefits and some public pensions.
- Virginia: Exempts Social Security benefits and some public pensions.
- Wisconsin: Exempts Social Security benefits and some public pensions.
How to choose the best state for your retirement
When choosing the best state for your retirement, you should consider several factors in addition to state income taxes. These factors include:
- Cost of living: The cost of living varies significantly from state to state. You’ll want to choose a state that is affordable and fits your budget.
- Climate: If you have a preference for warm or cold weather, you’ll want to choose a state that has a climate that you enjoy.
- Healthcare: Access to quality healthcare is important, especially in retirement. You’ll want to choose a state that has a good healthcare system.
- Amenities: Some states offer more amenities than others, such as parks, museums, and cultural events. You’ll want to choose a state that offers the amenities that are important to you.
- Taxes: While state income taxes are important, you should also consider other taxes, such as sales tax, property tax, and estate tax.
Choosing the right state for your retirement can have a significant impact on your financial well-being. By considering the factors discussed in this guide, you can choose a state that offers significant tax savings and a high quality of life.
Frequently Asked Questions
Q: Which states have the lowest taxes for retirees?
A: The states with the lowest taxes for retirees are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. These states do not have a state income tax, and they also offer other tax breaks for retirees.
Q: What types of retirement income are exempt from state income tax?
A: The types of retirement income that are exempt from state income tax vary from state to state. However, some common types of exempt income include Social Security benefits, pensions, and withdrawals from retirement accounts.
Q: How can I find out more about the tax laws in a particular state?
A: You can find more information about the tax laws in a particular state by visiting the state’s Department of Revenue website. You can also contact a tax advisor for more personalized advice.
Q: What other factors should I consider when choosing a state for retirement?
A: In addition to taxes, you should also consider the cost of living, climate, healthcare, amenities, and other factors when choosing a state for retirement.
Q: How can I save money on taxes in retirement?
A: There are several ways to save money on taxes in retirement. Some common strategies include contributing to a Roth IRA, making tax-deductible contributions to a traditional IRA, and investing in tax-efficient investments.
Additional Resources
Disclaimer:
This guide is for informational purposes only and should not be considered tax advice. Please consult with a qualified tax advisor for personalized advice.
State taxation of individual income
As of right now, individual income is exempt from tax in seven states: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Only interest and dividends are liable to state taxes in New Hampshire and Tennessee.
In every other state, there are significant differences in how retirement income is treated tax wise. For instance, in Illinois, Mississippi, and Pennsylvania, income from 401(k)s, IRAs, and pensions is not subject to state tax. Pension income is not subject to state tax in Alabama or Hawaii, but income from 401(k)s and IRAs is.
A number of states give a credit or exempt a portion of pension income; these states include:
- Alabama
- Arkansas
- Colorado
- Delaware
- Georgia
- Hawaii
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Michigan
- Missouri
- Montana
- New Jersey
- New Mexico
- New York
- Ohio
- Oklahoma
- Oregon
- Rhode Island
- South Carolina
- Utah
- Virginia
- Wisconsin
The state income tax rate is another important consideration. In Arizona, New Mexico, North Dakota, and Ohio, for instance, the marginal income tax rates are less than 5%. In contrast, each of the states of Colorado, Illinois, Indiana, Michigan, and Pennsylvania has flat tax rates below 5%.
Conversely, the highest state income tax rates are in California (12.3%), Hawaii (11%), New York (10.9%), New Jersey (10.75%), the District of Columbia (10.75%), Oregon (9.9%), Minnesota (9.85%), Iowa (8.53%) and Wisconsin (7.65%).1
State and local property taxes
Property taxes at the state and local levels are additional important considerations. For most retirees, the annual property tax based on their home’s value is the largest tax they pay. Nonetheless, retirees may be eligible for property tax credits, exemptions, and abatements from certain states and local governments. For example, they may not have to pay the school tax component of their property taxes.