When It Comes to Taxes: What Is Your Best State for Retirement?
Category: Financial and taxes in retirement
March 21, 2025 — Finding a tax-friendly location to retire is very important for a significant percentage of retirees. High income individuals often find a state with no income or sales tax very attractive. But other taxes, like those on property or pension and Social Security, can be very important considerations, and should not be overlooked. LIkewise, if your retirement income is low, state income taxes will be a minor consideration.
Just because a state has no income tax doesn’t mean that it might be the best one for your tax situation. Some states, for example, offer generous tax exemptions for military retirees or public servants, making them equally attractive. Others tax other kinds of income like pensions in very friendly ways. Some have generous deductions based on your age. Considerations like your desired lifestyle, where your family and friends live, or a climate where you can pursue your favorite activities, might be a lot more important to your retirement happiness than saving a few dollars on taxes. States like Texas tend to have high property taxes, which can neutralize its not having an income tax.
Major Taxes in Retirement
The major state taxes you need to be concerned about are property taxes, income taxes, sales taxes, estate and inheritance taxes, and how your pensions, IRA distributions, and Social Security will be taxed. All of these factors need to be considered together for your particular situation. You should also be concerned about local differences – cities in many states (e.g.; New York City) charge significant sales and income taxes beyond what the state levies, and property taxes can vary within a state. This article is meant as general guidance – it is not meant to be a definitive statement on exactly how all of the states tax all of these components – there are way too many states and they change their rules too frequently!
Income Taxes. There are 8 states that have no income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire only taxes certain amounts of dividend and interest income. Income tax rates (and marginal rates) in the rest of the states can differ widely. For example in California the marginal tax rate is 4% for incomes above $51,000, and 12.3% for heads of households over $980,988. Pennsylvania has a very low flat tax rate of 3.07%, although some local jurisdictions can add to that.
State Sales Taxes. Five states have no sales tax. Those include Alaska (though local jurisdictions can impose sales taxes), Delaware, Montana, New Hampshire, Oregon. In the grand scheme of things, sales taxes are a relatively minor part of a retiree’s budget, unless you buy a lot of expensive items like cars and boats.
Property Tax. Property tax is often the the most burdensome one for retirees. These taxes are based on the worth of your home, but they bear no relation to your income or ability to pay. Take the example of Warren Buffett, reportedly the 3rd richest man in the world. He lives in the same house he bought for $31,500 in 1958 (appraised at $1.4 million in 2025). The City of Omaha collects the same amount of property taxes on that home as from any other similarly valued house – even if owned by a retired person whose income is vastly smaller than Mr. Buffett’s.
Most, but not all, southern states have low property taxes, whereas the old industrial states of the northeast and midwest tend to have high property taxes. Louisiana has the lowest and New Jersey the highest property taxes in the nation. For example, the median property tax paid in Louisiana was $918, whereas in New Jersey it was $8,880. Of course the value of homes is much higher in New Jersey, as is household income. Some states have ambitious programs to try to protect seniors and others from exorbitant property tax increases. California is one of those. Florida’s Save Our Homes law is extremely popular – it limits increases in the appraised value of primary homes owned by permanent residents to the cost of living or 3%, whichever is less.
Taxation of pensions. This area of taxation is extremely complex and all over the map, depending on the source of the pension and where you decide to live. If you are going to receive a sizable pension, that can have a big impact on the taxes you pay. Many states exempt some or all federal, state, and local government pensions from state income taxation – those include Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Mississippi, New York, and Pennsylvania (plus, see above for the 8 states that have no state income tax at all). In Michigan these exemptions are being phased out; whereas Georgia is going in the opposite direction – it will gradually phase out taxation of pension and social security income. More than half of all states exempt all or most military pension income. Several states have no exemption for pensions of any kind, and those include California and Hawaii. See Kiplingers: “How States Tax Retirement Income” for a state by state list. Caution: the states frequently change their rules on pension taxation. Before you make a retirement decision based on this factor, check with the individual state tax website as well as a qualified professional.
Taxation of Social Security. There are 9 states that tax Social Security. Some follow the federal rules for taxing Social Security, while others have their own rates. Here is a link to a Kiplinger chart with capsule summarizes of state by state taxation of social security income.
Distribution of 401k and IRAs. This can be a very important taxation consideration for retirees who have significant balances in these accounts. Unfortunately, state taxation of these distributions is often overlooked. Required Minimum Distributions (RMDs) generally start at age 73 for individuals born between 1951 and 1959, and at 75 for those born in 1960 or later, based on the SECURE 2.0 Act of 2022. The amount you must take out each year is based on your remaining life expectancy. The required IRS distribution percentage starts at 3.65% at age 70 and goes to 15.87% at age 100. These distributions are treated as ordinary income for federal purposes, but their treatment can vary by state. The majority of states with income taxes include these distributions as income.
Inheritance and Estate Taxes. Twelve states have estate taxes and six have inheritance taxes. Maryland has both. Most base their rates on the federal rules, while others have their own. See Tax Foundation.
Bottom line
We hope you see by now that choosing a tax friendly state isn’t quite as simple as finding out if it has an income tax. While that is a big advantage if your retirement income is high, other factors could outweigh that advantage.
Comments? Is your state tax friendly? Do you wish you had chosen a different one bases on your experience there? Please let us know in the Comments section below.
Comments on "When It Comes to Taxes: What Is Your Best State for Retirement?"
LS says:
We arrived in Texas many years prior to retirement due to job relocation. Not having a state income tax is nice but only for the fact that we don't have to do another tax filing each year. The big taxes here are property tax and sales tax. Both are pretty high. As the article states, sales tax is a big factor when buying a new vehicle but is a moderate expense otherwise and some things are exempt from the sales tax. The big tax expense, especially for a retired person, is the property tax. In Texas, schools are primarily funded by property tax. Each school district sets its own property tax rate and they can vary widely. In 2021 we downsized and moved to a more rural area in the next county. That area is now rapidly growing and the need for new schools is increasing the property taxes. In addition, each municipality levies property taxes as well as other taxing authorities such as community college districts, public hospital districts and county taxes. Many of these taxing authorities do offer a reduced tax rate for seniors and disables residents and that helps but if your property has greatly appreciated over time while your income has declined in retirement, your property taxes are going to be something to be considered in retirement.
Larry says:
First a correction to one statement in the article. The sentence “Just because a state has no income tax doesn’t mean you should rule that state out.” The word “no” should be replaced by “an.” The rest of the article and the note from LS are excellent reminders that a zero state-income-tax can mask other costs that might affect your decision on where to live. First, calculate overall cost of living, of which income tax is just one component. More important, consider your own situation and lifestyle. If you require, or expect to require, high quality healthcare, for example, hospitals in an income tax state might offer more options than a Texas or Florida. Seeming intangibles like traffic, extreme heat summers, climate disasters (and flood insurance) and distance to airports if you travel for leisure or to visit the grandkids might persuade you to look more seriously at states with an income tax. Finally, avoid the common knee jerk mistake that zero state income tax will protect your retirement assets. If you are a billionaire, sure. But if not, not necessarily.
Admin says:
Thanks for the correction Larry. We have amended the article per your suggestion. We agree, tax friendly is a little more complicated than it first appears.
Kat says:
As briefly noted by the article's bottom line, it's important to remember that taxes are just ONE of the elements to consider. Low taxes might mean many fewer or poorer amenities (libraries, community centers, community pools/parks, adult education, etc.). If you have to pay a high HOA fee or pay privately for those types of resources, that could quickly offset tax savings. Likewise, a higher cost of insurance, real estate, school or personal property taxes to offset income taxes, a high sales or gas tax, and other expenses could quickly cancel out any benefit from an income tax saving. And that's all before people look at things like the cost of living & housing, availability of good medical care incl. nursing homes if anticipated, whether family is nearby (for people who consider that), estate taxation and other considerations. When I was planning my retirement a few years ago, I had a big whiteboard spreadsheet to compare things that were important to me for each of the states I was considering. Very nerdy! The results were surprising. PA, for ex., ended up with a net cost of living lower than FL since it didn't tax 401K withdrawals, its sales tax had more exclusions and FL's insurance & HOA costs would have been much higher. Of course, things change and everyone has different criteria. (Ultimately, I threw all my research away and decided to retire near family. Not the cheapest option or most expensive option, but for me it was the best choice LOL)
Yolande says:
I agree with the tax issues here. You may not pay the state but you best believe there are many other taxes you'll pay to make up for it. There's no way any govt. can survive and provide services without taxing something. They tout that a lot in NV for sure but it's made up in the casinos, business licenses and a host of other things. That was my first experience with it. While not filing a 2nd tax return sounds good there's a hidden set of taxes that you need to explore to understand "why" that state is tax free. No govt. can survive without taxing its citizens. I'm moving to FL next yr. My friends already told me the property taxes are insane and insurance is expensive. I knew about the insurance and the property taxes are high from what I've seen. HOA fees too wow! I'm currently looking for a place that doesn't have high HOA fees. They go up annually and can easily replace a mortgage payment. The high cost of living in America is a huge problem. It needs to be addressed and lowered. I believe in Capitalism but not greed and taking advantage of people.
Dave McKay says:
I live in Florida, my daughter lives in Hawaii. My HOA fees are only $191 a month, property taxes are high, but the cost of a real estate transaction is low, as compared to Pennsylvania,from where I came. Closing costs are cheap.
Hawaii has high state income tax, but super low property taxes, as long as you are a year round resident