What States Offer the Best Tax Treatment for Retirees?
Category: Financial and taxes in retirement
April 3, 2022 — For many people entering retirement, the holy grail is to find a state where their hard earned money won’t get taxed. When it comes to the 8 states that have no income tax, that’s easy: nothing will be taxed at the state level: not Social Security, pensions from any source, distributions from 401(k)s and IRAs, or interest, dividends, and capital gains.
But of the remaining 43 states and District of Columbia, a complex patchwork exists. Each state seems to have a unique approach to taxation, levying taxes on some of these items completely or partially, while exempting others. Finding out which states tax what can be confusing, made more difficult because every retiree brings a different package of earning sources to the party. Because the states frequently change what is taxed and what is exempt, it is best to check state websites and or your accountant before basing any decision on this information, which should be used as a survey rather than a definitive guide.
8 states with no income tax
For people who have a goal of escaping all state income taxes, the simplest approach is to move to one of the states with no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, No more research is required, you won’t pay state income tax on any income source.
Types of Income some states do not tax
As we mentioned earlier, part of the difficulty for retirees looking to avoid or minimize state income taxes is the many types of income that can get taxed: earned income, Social Security, pensions of many types and sources, distributions from 401(k)s and IRAs, and interest, dividends, and capital gains. Finding out the tax status of of the sources you might have in the retirement states you are interested in can be a challenge.
Social Security
Thirteen states tax all or a portion of Social Security benefits. Those states are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
IRA and 401(k) retirement distributions
Illinois, Mississippi, and Pennsylvania don’t tax distributions from 401(k) plans, or IRAs. Other states with income taxes might have some exclusions or thresholds.
Pensions
Alabama, Illinois, Hawaii, Mississippi, New Hampshire, and Pennsylvania exclude pension income from state taxes. But other states might exclude pension income totally or partially from certain sources, like military or government pensions.
Military pensions
Seventeen states do not tax military pensions.
These states do not have any exemptions for tax military pensions:
California
Georgia
Kentucky
Montana
Rhode Island
Vermont
Virginia
These states tax partial amounts of military pensions:
Arizona
Delaware
Idaho
Maryland
New mexico
Oklahoma
Oregon
South Carolina
Washington DC
West Virginia
Government pensions
State, local, and federal pensions are tricky when it comes to state taxation. Certain states offer exemptions, depending on the source (e.g.; an in-state pension might be exempt, out of state not). Check with each state you might be interested to know for sure.
Investment income
New Hampshire does not have an income tax on earned income, although it does tax interest and dividends. Other states with an income tax will also tax this type of income to varying degrees.
Standard exemptions vary by state
As the late night commercials always say: “Wait, there’s more!”. Besides knowing how each type of income might be taxed in a given state, to truly understand the taxation situation in a given state, you also have to have a picture of standard or senior exemptions that might apply. Some states are very generous with standard deductions for seniors, exempting all income up to a certain level or under certain circumstances. Others tax almost single dollar of income. One recent example is Maryland, which just passed senior tax relief for couples making up to $150,000 per year.
Bottom line
If state taxation is important to you in your retirement location decision, do your research. Run a sample return or ask your accountant to do one for you. You don’t want to face an unpleasant surprise.
For Further Reading:
AARP – States That Don’t Tax Retirement Income
States That Don’t Tax Military Pensions
Comments:
Is state taxation important to you? If so, what considerations or decisions have you made? Please share with everyone else in the Comments section below.
Comments on "What States Offer the Best Tax Treatment for Retirees?"
SteveS says:
I always felt that choosing my retirement spot would depend solely on factors such as physical environment, weather, cultural events etc, and felt taxes wouldn't make or break my decision. I still feel that way, but as I travel from a small town in Ohio on the Pennsylvania border to Jamestown New York a couple of times a month, I go through Erie, PA and shop for clothes (no tax on clothing in PA), and I decide which state has the lowest price to fill my car with gas on a given week as my journey takes me through Ohio, Pennsylvania and New York. So I have to admit I have started to pay more attention to taxes than what I thought I would, and maybe I should just stay put. It actually works out well for me.
John Brady says:
Thought you might be interested in the recently passed tax relief legislation in MD that which will give retirees there a needed boost. It begins this July and expires in 5 years. I’m betting it will never expire.
According to the report it: "includes tax relief for retirees 65 and older making up to $100,000 in retirement income, and married couples making up to $150,000 in retirement income."
Maryland Announces Tax Relief for Many Retirees, Families, Businesses – NBC4 Washington (nbcwashington.com)
Editor's Comment: Thanks David, this is great news for Maryland seniors!
Mike D says:
There's a wealth of information for each state at the Tax Foundation's website.
https://taxfoundation.org/
Steve Z says:
Well MD is losing retirees so they need to do something to keep them..Formally from MD I'd never retire there but I really do like Larry Hogan. .
JD says:
One thing that always bother me about articles like this is that they are focused on income taxes. In many states (including those that have no income tax) property taxes are the biggest tax burden a retiree can face. For example, Illinois does not tax pension or IRA income, but if you live in the Chicago area property taxes are HUGE. Across the border in Indiana, you do pay taxes on IRA and pension income, but property taxes are usually 1/4 to 1/3 what they are in Illinois for a similar home. In most cases, the savings in property taxes FAR exceeds any tax paid on pensions or IRA distributions.
These articles need to start looking at the entire tax picture of a state, not just income taxes.
Clyde says:
Another angle on the state tax situation is the amount of services a state or city provides for those taxes. Low tax states generally have less quality or availability for areas such as road/highway maintenance, schools, medical care, etc.
Shelley Pitchford says:
Excellent point by JD. Property taxes are high in Texas and Florida and this could well offset the cost of something taxed in another state that does not tax property or income. So many factors to consider, but certainly the cost of housing has to be included in any analysis.
Thanks for all the good comments.
Shelley from CA
Larry says:
JD’s point is very well taken. I have reviewed property taxes in southeast US golf communities over the last 15 years and they have not increased much, even as prices for homes have increased significantly. This will change as local municipalities need to build infrastructure to accommodate the increase in population. But for now, residents of high property tax states in the Northeast and some in the Midwest will find their property taxes cut by as much as 50% in the southeast states, and on comparable homes that cost much less than up north.
Sheldon says:
When the subject of tax treatment for retirees comes up, New York State is usually not mentioned. However, New York does not tax social security, nor does it tax federal, military or state pensions. And there is a state program for homeowners, called STAR, in which the state refunds a portion of your property taxes, circa 10%, every fall.
We relocated to New York in 2018 from California for personal reasons, but you can imagine the smile on our faces when we realized that none of our income, consisting of social security and federal pension, was taxed by the state. As others have rightly advised, taxes are only one of several factors in any decision about where to live, but New York State's tax situation for retirees may come as a surprise to many and should be part of the mix.
BillyBogey says:
We all have Choices Sport's Fans!!
Dave says:
My daughter lives and works in Hawaii. The state income tax is very high, but the property taxes are very, very low for residents. Govt. gets their money in some way, so don't just concentrate on the income taxes, look at the whole tax picture!
HEF says:
Dave is right! Having moved from New England to SE Tenn, for work, in 2007 we were overjoyed to see our property tax a fraction of what it had been and no income tax UNTIL... we realized that sometimes - you get what you pay for. Taxes are not always a bad thing. They pay for the local infrastructure, the schools and services to the community. When taxes are low, the streets are not the best, the bridges suspect, the fire dept. is volunteer, you get septic instead of sewer and we even had to pay to "join" the local Library! We couldn't wait to get back to New England!
Make taxes a part of your planning but I don't recommend moving somewhere JUST for that reason.
Larry says:
Amen Sheldon, Dave and HEF. In most cases, we seem to get what we pay for in high-tax states. Retirees who chase low income taxes as a primary reason to relocate to a particular state make a potentially catastrophic mistake. We are all going to need healthcare at some point as we age, some sooner than later (some, because of pre-existing conditions, right away). According to the latest US News & World Report rankings, the top 5 states, in order, for access to healthcare are Hawaii, Massachusetts, Connecticut, Rhode Island and Vermont -- five states we associate with high income-tax rates. (Note: In rankings by overall tax rates at Wallethub.com, these five states are in the bottom half -- in other words, overall taxes are indeed high; and, yes, they are all small states so you are never too far from a hospital). But if you look at these same states by the category of "access to healthcare" AND "healthcare quality" (total healthcare ranking in parentheses), Hawaii ranks first in both categories (#1), Massachusetts 2nd & 14th (#2), Connecticut 3rd & 16th (#3), Rhode Island 4th & 32nd (#9), and Vermont 5th & 36th (#18). Conversely, the southern states that tend to be celebrated for their lack of an income tax rank as follows: Florida 41st & 18th (#25 overall), Texas 45th and 39th (#31), and Tennessee 37th & 23rd (#40). I don't believe it is coincidence that the high tax states also rank high on the list of quality of education. We retirees may think we are past the point of caring if your taxes support pubic education, but there is a direct through-line between quality education and quality of healthcare...As a resident of Connecticut who is about to file my state income-tax return, I am not complaining. Having three state-of-the-art hospitals within 20 minutes of our home, one just 12 minutes away, and the experience of great healthcare, is something money can buy.
Larry says:
I should have added in my above long-winded ode to high tax states, that the third category of health care that was a factor in overall ranking is "public health."
John Brady says:
I agree with several of the other commenters that income taxes are not the whole story. Property taxes in most of the New England states, midwest, and Texas (no income tax) can be very high and much more punitive than income taxes. Also, property taxes, though regressive, are usually not that big a deal unless you are buying big ticket items like cars and boats.
RichPB says:
I completely agree with all those who point out that state income tax is not a good basis for choosing a retirement location. My view is so strong that I haven't even read the article (quick scan, nothing new). When a definitive study is made including not only income tax but sales tax, property tax, gas tax and any other relevant form of taxation, then it will be worth my time. Meanwhile, I'm satisfied with the balance I've found in NC despite some who choose other states for sometimes curious reasons.