Best Tax Friendly State For Retirees


Total Tax Burden: 574%

The Top 7 Most Tax Friendly States to Retire In

Before 2016, Tennessee taxed income from investments, including most interest and dividends but not wages. Legislation passed in 2016 included a plan to lower taxes on unearned income by 1% per year until the tax was eliminated at the start of 2021. To make up for the shortfall, Tennessee levies high sales taxes and the highest beer tax of any state in the union at $1.29 per gallon.

With full implementation of the new legislation, Tennessee expects to attract retirees who depend heavily on investment income. The states total tax burden is 5.74%, the second-lowest in the nation. In the affordability category, Tennessee ranks 17th overall, and on the U.S. News& World Report Best States to Live In list, it ranks 29th.

In 2019, at $9,868 per pupil, Tennessee ranked just above Texas in terms of education spending in the southern U.S. It also did a better job of fairly distributing its school funding than the Lone Star State did, earning the Equality State a C in 2015.

At $7,372 per capita, Tennessee ranked 39th in terms of healthcare spending in 2014. The state hasnt received an official letter grade for its infrastructure yet, although the ASCE did note that 4.4% of its bridges are structurally deficient and 276 of its dams have a high hazard potential.

States With The Highest And Lowest Cost Of Living

Another factor important to seniors is the cost of living. If you live in California, for instance, your money wont go as far as it would if you lived in West Virginia.

Using a cost-of-living index that compares each state with a national average score of 100, Sperlings Best Places ranks each state by how much it costs to live there. A ranking of less than 100 means the state has a lower cost of living than the national average, and value higher than 100 means the states cost of living is higher than the national average.

For example, the state with the lowest cost of living, West Virginia, has a score of 84.

Hawaii is ranked as the most expensive state, with a score of 187.

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Tax Credits For Older Adults

One of the most significant tax breaks available to older adults is the tax credit for the elderly and disabled. This tax credit can wipe out some, if not all, of your tax liability if you end up owing the IRS.

You must be age 65 or older as of the last day of the tax year to qualify. That January 1 rule applies here, tooyoure considered to be age 65 at the end of the tax year if you were born on the first day of the ensuing year. You must be a U.S. citizen or a resident alien, but if youre a non-resident alien, you might qualify if youre married to a U.S. citizen or a resident alien.

In general, you must file a joint married return with your spouse to claim the credit if youre married, unless you didnt live with your spouse at all during the tax year. And you wont be eligible for this credit if you earn more than the following:

  • $17,500 or more and your filing status is single, head of household, or a qualifying widow or widower
  • $20,000 or more and youre married, but only one of you otherwise qualifies for the credit
  • $25,000 or more, and you file a joint married return
  • $12,500 or more, and you file a separate married return, but you lived apart from your spouse all year

These numbers are based on your adjusted gross income , not your total income. Your AGI is arrived at after taking certain deductions, also known as âadjustments to income,â on Schedule 1.

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Best States To Retire In For Tax Purposes

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Many people consider relocating in retirement in order to reduce their cost of living and make their savings last longer. When weighing the pros and cons of moving to another state, its important to consider the total tax burden there, including state and local taxes on retirement income, property tax, even sales tax. Also, some areas with a lower tax burden have a higher overall cost of living, which can cancel out any savings.

There are many factors to consider when deciding where to put down roots in retirement, from climate to healthcare access. Below we look at the best states to retire in for taxes, and how to tell if moving will be worth it.

Rd Best: District Of Columbia

Retirement Taxes: Which Are the Most Tax Friendly States for Retirees ...

First, the bad news: D.C. is a notoriously expensive place to live, with eye-popping housing costs whether you want to rent or buy. Retirement income, like distributions from 401 plans, is taxed. And if youre lucky enough to worry about it, take note: Theres a tax on estates over $4 million, with rates starting at 11.2%.

Why youll still want to move here: This not-quite-a-state actually has moderate sales taxes, clocking in at 6%, with groceries and prescriptions exempt. There are also surprisingly low property taxes, with a median of $564 per $100,000 in home value, with special property tax breaks for seniors for instance, theres a 50% reduction for seniors with a household adjusted gross income of under $135,750. Perhaps most importantly, Social Security benefits arent taxed, and theres a fat income tax credit of up to $1,200 for qualifying senior property owners.

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Low Tax State #: Kentucky

Kentucky is another state where retirees find a life thats less burdened by taxes. Social Security isnt taxed, and your retirement income from pensions, annuities, and other sources, up to $41,110 is also exempt. Thats per person, not per household.

If youre over 65, youll automatically qualify for a Homestead Exemption on part of your homes value. And while there is an inheritance tax in Kentucky, everyone in your immediate family is exempt from the duty.

  • State Income Tax: 2 6 percent
  • State Sales Tax: 6 percent
  • Inheritance Tax: Yes

Th Best: South Carolina

First, the bad news: Again, the thorn in your side here will be high sales taxes, at an average combined state and local rate of 7.46%. However, groceries and prescription drugs are exempt.

Why youll still want to move here: Social Security benefits are exempt from state income tax, and there is no estate or inheritance tax. Seniors can also exclude up to $10,000 in retirement income from taxes . Seniors who are single filers are also allowed to deduct $15,000 from other taxable income, or $30,000 for joint filers. Best of all, property taxes are very low, at a median of $601 per $100,000 in home value, and seniors whove lived in South Carolina for at least a year can also exempt the first $50,000 in property value.

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Finding The Right State & Living The Goodlife In Retirement

Choosing the right state to settle down in based on taxes can be a helpful tool to make the most of your retirement finances, but its important to remember that there are plenty of other factors to consider. Be sure to review each of these items before committing to relocating to a new state for retirement.

Living in one of the most tax friendly states for retirees isnt the only way to ensure that your retirement finances remain secure and sufficient to have the quality of life you deserve. Even for those who have not saved up the ideal amount, there are options.

GoodLife reverse mortgages allow retirees to age in place, living in their home and receiving a steady stream of cash flow. Reverse mortgages allow you to access the equity in your home, converting into monthly payments, a lump sum, or a line of credit that you can use to cover a variety of retirement expenses.

Even if the cost of living and taxes in your state are difficult to handle, a reverse mortgage can help staying in your home state make more sense. By supplementing other retirement income sources, a reverse mortgage loan allows retirees a higher degree of financial freedom while also making it easier to stay right where they are.

Retirement Income Exclusions Based On Per

TOP Tax Friendly States for Retirees- 2021’S TOP 10 LIST

The 16 states in the table below offer retirement income exemptions on a per-spouse basis, not as a combined exemption for the household. Which means that, in order to access up to double the per-person exclusion, each spouse needs to have their own retirement income.

Example 3a: Jimmy and Rosalynn are married and are both 95 years old. They live in Georgia, where taxpayers age 62 and older can each exclude up to $65,000 of their own retirement income for a combined maximum of $130,000.

Jimmy and Rosalynn have a combined income of $145,000, which is roughly split between them. Since they each receive income in excess of the per-person maximum exclusion permitted in Georgia, they are entitled to take the full combined exclusion of $130,000, with a taxable state income of $15,000.

Example 3b: Amy, Jimmy and Rosalynns daughter, is married to James. Amy and James are both 65 years old and also live in Georgia, so they, too, can also exclude up to $65,000 of their own retirement income.

Amy and James also have a combined income of $145,000, but since Amy earns the lions share of the familys income and James earns only $5,000, which is less than the maximum retirement income exclusion amount allowed by their state, they cannot take the full combined exclusion. They are only entitled to exclude $70,000 of their income, with a taxable state income of $80,000.

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Most Tax Friendly States For Retirees In 2021

The most tax friendly states for retirees is an important thing to know if you’re looking to retire somewhere in the U.S. but you’re not sure where to go. One of the big things you may be thinking of is cost of living. How much do things like homes, groceries and healthcare cost in your chosen city?

But listen, you shouldnt just be thinking of how much youll spend. You really need to think about how much you can save. You can maximize your current financial situation by moving to one of the tax friendly states for retirees. Think about it…why would you hand more of your hard-earned money to the government? If youre open to retiring anywhere in the U.S., you absolutely have a choice to keep more of your earnings. So lets get started reviewing your best options when it comes to taxes.

Property Tax Relief: What You Should Know

Another important factor to consider when deciding which states are most friendly for retirees is what deductions or exemptions they have on property taxes. For retirees working with a limited income, property taxes can be tough. For instance, if your income was high enough to purchase a high-value home before retiring, but your retirement income is much lower, the property taxes might no longer be manageable.

Many states offer exemptions and deductions for retirees and people over the age of 65. However, this can vary significantly by state, and even by county, as property taxes are assessed by local authorities. Here are a few states with low property taxes that retirees may consider moving to:

Its important to remember, however, that there are plenty of other factors that should go into your retirement relocation decision not just which tax friendly states for retirees are best.

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How Expensive Is The State Where You Plan To Retire

Benjamin Franklin famously said, in this world, nothing is certain except death and taxes. How true that is! Everyone, yes, even retired folks, pay taxes. There are two bucketsfederal, and state and local.

Federal taxes are levied by the U.S. government at the same rate regardless of where you live. But state and local taxes change depending on location. And, unsurprisingly, the level and type are as varied as there are flavors of ice cream! So, before you decide where to put down your retirement roots, consider how your choice can impact your retirement savings.

Putting State Income Tax Planning Into Practice For Financial Planning Clients

Top 15 Most Tax

The tax burden in any given state will depend on a familys total tax picture. But the examples above show that some states known for their high top-marginal rates can, in spite of their reputation, actually be quite tax-friendly to retirees. Some states, like Georgia, Illinois, Mississippi, New Jersey, and Pennsylvania, are often effectively zero-tax states for some retirees. In many other states, state taxes might amount to only 1% or less of the total income earned.

Typically, the more a household depends on Social Security and qualified retirement plans and pensions, the higher the likelihood that they will pay little or no state income tax. Yet the list of states that partially or fully exclude these types of income is much larger than many clients might imagine and by helping clients put this in perspective, advisors can potentially broaden their range of possible retirement locations.

If a retiree is looking to minimize their state tax burden in retirement, then they might have more options than just the 9 states with no income tax. This is because, depending on their mix of income from Social Security, retirement plans and pension distributions, taxable investment income, and earned income, the list of potential states with little or no tax that would apply could include numerous other states, including ones with a high-tax reputation.

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States You Might Want To Avoid

A few states are less kind to retirees. Not only are some of their tax rates high, but they also fully tax pension income, as well as 401 and IRA distributions. According to the Tax Foundation, a nonpartisan tax research group in Washington, D.C., these states and their top tax rates as of the 2021 tax year are:

  • California: 13.3% on incomes over $1 million , but Social Security benefits aren’t taxed here
  • Minnesota: 9.85% on incomes over $166,040
  • Vermont: 8.75% on incomes over $204,000
  • Idaho: 6.925% on incomes over $11,760 , but Social Security benefits that are included on a federal return aren’t taxed
  • Connecticut: 6.99% on incomes over $500,000
  • Nebraska: 6.84% on income over $32,210
  • West Virginia: 6.5% on income over $60,000
  • Rhode Island: 5.99% on income over $150,550
  • Kansas: 5.7% on income over $30,000
  • North Carolina: 5.25% on all income, but Social Security benefits aren’t taxed
  • Massachusetts: 5% on all income, but Social Security benefits included in federal income aren’t taxed
  • Arizona: 8% on income over $250,000 but Social Security benefits that are included on a federal return aren’t taxed
  • Indiana: 3.23% on all income, but Social Security benefits aren’t taxed
  • North Dakota: 2.9% on income over $440,600

Other Taxes To Consider During Retirement

Housing costswhich includes mortgage, rent, property tax, insurance, maintenance, and repair feesrepresents the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year on housing expenses: representing almost 35% of their annual expenditures. To help minimize these expenses, you should also consider property taxes when determining where you want to retire.

Based on effective real estate tax rates , Hawaii, Alabama, Colorado, Louisiana, and the District of Columbia have the lowest property taxes in the nation. Heres how the seven states mentioned earlier fared: Alaska , Florida , Nevada , South Dakota , Tennessee , Texas and Wyoming . You should also review average dollar amounts based on median home values to nail down a ballpark number of what youd likely spend in this regard.

Based on property taxes alone, New Jersey is the worst state to retire in. The Garden State taxes at a 2.49% rate, and the average property tax bill is $8,965. This dollar amount ranks highest in the nation.

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Property Taxes And Senior Property Tax Relief Programs

Homeownership is a good way for seniors to lock in their housing costs for the long run so that they dont have to worry about shifts in the housing or rental market. In some states, however, high property taxes or property taxes that can grow rapidly from one year to the next serve to discourage retirees from owning a home. Property tax rates and rules are drastically different between states.

For example, New Jersey homeowners typically spend around $8,400 annually in property taxes. In Alabama, most homeowners spend much less, at right around $600 a year.

One way many states help retirees limit the burden of property taxes is by offering exemptions or circuit breakers. The terminology varies by state, but exemptions typically allow seniors to protect part of their homes value from property taxes. They often have income limits, so households earning more than a certain amount are not eligible.

Circuit breakers can have the same effect as an exemption. Sometimes, they also limit the amount property taxes can increase from one year to the next for seniors.

Property tax deferrals are another helpful form of property tax relief for seniors. Deferrals allow seniors and retirees to put off payment of some or all of their property taxes until a later time. It is typical for deferred property tax payments to be subtracted from the revenue of an eventual home sale, meaning they never come out of a seniors income.

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