So Which Are The Best States For Retirement Taxes
Well, the absolute best state for retirement taxes will depend a bit on your own financial profile.
For example: If you will be leaving behind significant assets to heirs, avoid states with major estate taxes. Or, if you have valuable assets and will be earning sizable returns, then you might want to look for states with low taxes on interest and dividends.
However, in general, here are five of the states best for retirement taxes:
Taxes And Retirement Living In Pennsylvania
When looking for the right state to begin your retirement, you want to consider taxes. Youll need to ask yourself what type of income is taxed in PA so that you can stretch your retirement income as far as it will go. The tax benefits of Pennsylvania alone make it the best place for retirees.
If youve asked yourself the question, is retirement income taxable in PA?, then the answer is no! Pennsylvania does not tax its residents retirement income. It is one of only two states, and the only state on the East Coast, that considers pension income completely tax exempt.
The Keystone State also has the lowest flat tax rate in the country at just 3.07 percent. It is impossible to escape federal income taxes, but when you retire, you might lower your tax obligation by moving to a state like Pennsylvania where the flat tax rate is low and pension income is tax exempt.
Retirement income typically consists of pooling income from several different sources:
When you are a resident of Pennsylvania, your retirement income is tax exempt. Pennsylvania is one of the most generous states in the country for retirees income. They are also helpful when it comes to other taxes.
What Does The Best Place For Retirement Really Mean
Choosing where to retire is ultimately a personal or family decision, and while we’ve aspired to build an index that reflects what really matters to people when they retire, everyone has unique circumstances and priorities that can drive that decision.
As a reflection of that, our rankings dramatically change when looking at individual factors. For example, the highest scoring states for weather are among the lowest scoring states overall. However, that may discount retirees that place pleasant summers, mild winters, and sunshine over cost and other factors.
Choosing where to retire isn’t an easy task. But with preparation, research, some luck — and a great IRA — you’ll find a location that fits your priorities.
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How High Are Property Taxes In Florida
Although property taxes are one of the main sources of revenue for local governments in Florida, property tax rates are not especially high. The states average effective property tax rate is 0.83%, just below the U.S. average of 1.07%.
At $245,100, the median home value in Florida is just above the national median. That’s fairly neutral news for seniors, who tend to spend a significant portion of their income on housing. Keep in mind, however, that in some areas, such as the city of Miami, housing costs are much higher than elsewhere in the state.
Low Tax State #: Alabama
Rounding out the top 5 tax-friendly states for retirees is Alabama. Alabamas tax exemptions for retirees might be more exciting than a Talladega race day.
If you have any type of pension at all, chances are its exempt. Specific examples include public and private pensions, and military pensions. Other income is subject to rates between 2 and 5 percent.
Property taxes are another area where retirees are fortunate. Everyone over the age of 65 is except from state property tax, but some cities may impose it. And while prescription medication is tax free, the state sales tax is quite high, at 10 percent in some areas.
- State Income Tax: 2 5 percent
- State Sales Tax: 4 percent
- Inheritance Tax: No
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Do You Pay Taxes On Social Security
Some individuals who receive Social Security must pay federal income taxes on their payments. However, no one pays taxes on more than 85 percent of their Social Security benefits. If you file a federal tax return as an individual and your combined income is greater than $25,000, you must pay taxes on your benefits.
Us States Where Your Retirement Dollars Stretch Further
Americans are free to enjoy their golden years in any state they please, but a new study found that the ideal places to live on a retirement budget are in the South or the Midwest.
Florida, Georgia, Michigan, Ohio and Missouri are the top five best states to retire when factoring in a range of criteria, according to Bankrate. The most affordable states to retire are Michigan, Tennessee, Missouri, Mississippi and Kentucky.
Bankrate based its ranking on several factors, including a state’s cost of living, tax rate, cultural life, percentage of retiree population, average temperature, crime rate and the likelihood of natural disasters.
“Every retiree has different priorities, but Michigan’s combination of an affordable cost of living and low taxes make it a compelling choice for value-minded retirees,” Bankrate analyst Jeff Ostrowski said in a statement.
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Factors That Make The Best States For Retirement
Numerous elements will influence where you decide to live in retirement. Everyones situation is unique, so some factors might rank higher for you. While there is no single clear choice for every retiree, consider the following when contemplating where the best state to retire in is for you:
- Cost of living: The money needed for essentials like housing, utilities, and food will depend on your location. As a result, the cost of living is likely the number one factor driving your decision.
Cost of living can be a tradeoff depending on your priorities. For example, youll pay more if you want to live in a major city like Miami or Atlanta. You might have to give up expensive vacations or other luxuries. However, in exchange, youll live in some of the worlds most vibrant, dynamic areas.
Is It Better To Retire In Utah Or Colorado
Colorado has a lower-than-average tax burden, which is perfect for retirees living on a fixed budget. Utah does impose a tax on Social Security retirement income, but it is not as high as in other states. Income tax rates in Colorado are among the lowest in the country.
The states top marginal income tax rate is 6.75 percent, and the top personal income-tax rate for individuals is 7.25 percent. In addition, the state has one of the most progressive tax systems in America, with a top rate of 0.9 percent on all income over $1 million.
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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.
States That Won’t Tax Your Retirement Income
Retirees can save a lot of money in these states that completely exempt the most common types of retirement income 401s, IRAs and pensions from taxation.
You’ve worked hard all your life, and now you’re retired . Unfortunately, there’s a pretty good chance that Uncle Sam is going to take a cut of your 401, traditional IRA or pension income. But what about your state? Will it take a bite out of your retirement income, too?
Most states tax at least a portion of retirement income . Your state might offer some tax breaks, but those breaks usually have limitations based on your age and/or income. A few states, however, completely exempt the most common types of retirement income 401s, IRAs and pensions from taxation. That’s a huge plus for retirees living in those states.
Here are 12 states where you don’t have to pay tax on any of your 401, IRA or pension income . If you live or plan to live in one of these states, you can stretch your retirement savings quite a bit further.
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What Is The Georgia Homestead Exemption
The Georgia homestead exemption is available to every homeowner who occupies his or her home as a primary, permanent residence. It exempts the first $2,000 from the 40% assessed value from property taxes. Seniors age 65 or older may be eligible for a double homestead exemption. To qualify, the applicants total household income, not including Social Security and pension income, cannot exceed $10,000 annually.
Other forms of property tax relief for retirees in Georgia include an exemption of all property value accumulated after the base year in which a senior age 62 or older applies.
So if your home is worth $80,000 when you apply and the value grows to $100,000 the next year, you will only pay property taxes on that first $80,000. If the property value grows to $150,000 over the course of the next seven years, you will still only pay taxes on the first $80,000. To qualify, household income must not exceed $30,000.
The Best States Overall
The states with the best overall tax environments for high income and high net worth retirees are Alaska, Florida, Nevada, South Dakota, Texas and Wyoming, since they do not levy income, estate, inheritance or gift taxes. Also, they stack up well in most other tax categories, except for Nevada and Texas . New Hampshire is also very advantageous but collects income tax on interest and dividends. Other states also have favorable tax systems, but not in each tax category like the six noted above.
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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
Total Tax Burden: 697%
This popular snowbird state features warm temperatures and a large population of retirees. Sales and excise taxes in Florida are above the national average, but the total tax burden is just 6.97%the sixth-lowest in the country.
Florida ranks 31st in affordability due to its higher-than-average housing costs. Still, Florida came in at 10 on the U.S. News & World Report Best States to Live In list.
In 2019, Florida was one of the lowest states in terms of school system spending, at $9,645 per pupil. In 2021 the ASCE gave Florida a C grade for its infrastructure. Six years earlier, Florida received the same grade from the Education Law Center for the fairness of its state school funding distribution. In 2014, its healthcare spending per capita was $8,076, $31 more than the national average.
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The Best States To Retire In From A Tax Perspective
Many factors influence the decision of where to retire. Family, familiarity of surroundings, climate and cost of living are among the many factors that affect ones choice of where to spend retirement years. What about state taxes? They are often overlooked and just accepted as an expense. However, for those with a keen eye for wealth preservation, state taxes are critically important in deciding where to live and ultimately retire.
Other Taxes That Affect Retirees
When choosing the best state for you to retire in, its a good idea to look into sales tax and property taxes too. States that dont charge sales tax are Alaska, Delaware, New Hampshire, Montana, and Oregon. On the other hand, New Hampshire has very high property taxes, reducing the benefit of no sales tax.
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States That Exempt Retirement Income
The remaining 41 states in the U.S. do have income taxes. However, three of them exempt retirement income plans, IRAs, and pension plans) from being taxed:
There are a couple of things to know, though. Mississippi does tax pension income for early retirement before age 59 1/2. Pennsylvania taxes pension income for residents who retire before age 60.
Also, all three of these states will tax any income that you make outside of retirement accounts. For example, if you receive dividends or sell stocks that aren’t held in an IRA or 401 plan, be prepared to pay taxes.
Taxes On Social Security Income
Each year about half of Social Security recipients will owe federal income taxes on this portion of their retirement incomes. You will owe taxes on your Social Security benefits when your income exceeds a total income threshold each year. For 2022, this threshold is $25,000 for single filers and $32,000 for joint filers. Fifty percent of your Social Security benefits count as taxable income.
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New Hampshire4th Best State To Retire In
New Hampshire offers year-round outdoor fun and four distinct seasons. Think skiing and hockey in the winter, apple picking and colorful foliage tours in the fall, farmers markets and antiquing, and beautiful coastlines to enjoy in the spring and summer.
That is a lot of charm to offer for someone looking to relax and get out of the rat race. No wonder over 18% of the population in New Hampshire is 65 years and over.
Plus, Social Security benefits, pensions or retirement distributions are not taxed and there is no sales tax.
|Cost of Living Rank- per US News||Healthcare Rank- per Us News||Median Home Value- per Zillow|
Property tax here averages 2.19%. New Hampshire is a good example of a state that has a lot to offer in terms of quality of life which is why it ranks higher on my list even though it has a higher cost of living. However, it is not as expensive as some other attractive east coast retirement options.
Does The State Tax Pensions
Many states tax income from pensions and 401 plans, but 12 states do not. These states are Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.
Most of these states dont have state income tax at all, with the exception of Illinois, Mississippi, and Pennsylvania. Alabama and Hawaii tax 401 plans and IRAs, but not pension plans.
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Washington5th Best State To Retire In
The natural beauty of Washington, which boasts over 3,000 miles of coastline and two major mountain ranges, makes moving to Washington an easy choice for nature lovers and active retirees.
The Pacific Northwest region is a tough place to beat when it comes to the quality of life and superb beautyfrom Oregon up to British Columbia, Canada.
Over 15% of the population is 65 or over and they enjoy access to the major metropolitans of Seattle and Spokane, both of which offer the benefits of large city living, such as sports teams, cultural activities and thriving food scenes.
Washington is known for its temperate climate and wet winters. Temperatures range from high 70s to low 20s throughout the year.
Washington is known as being tax-friendly to retirees. There is no social security tax and income tax is favorable. No state income tax means that income from pensions, social security and retirement account withdrawals are tax-free.
|Cost of Living Rank- per US News||Healthcare Rank- per Us News||Median Home Value- per Zillow|
Living in the western part of the state, especially close to Seattle, will absolutely make for a high cost of living situation.
However, it just may be worth the additional costs or you could look to nearby areas such as Tacoma or Snoqualmie for lower cost of living without making other major sacrifices.
Property taxes hover around 1% for the state.
States With Tax Exemptions For Social Security Income
Social Security is a core source of income for many retirees. And luckily , Social Security income receives favorable tax treatment from the Federal government as well as from many states. At the Federal level, a maximum of 85% of Social Security benefits are included in taxable income . Furthermore, even the amounts that are Federally taxable are themselves often completely or partially exempt from state income tax.
There are 32 states and the District of Columbia that completely exclude Social Security income from their normal income taxation. Which means that, including the 9 states with no state income tax noted earlier, Social Security income is not taxed in 42 U.S. jurisdictions!
Notably, the list includes some of the states with the highest top marginal rates , meaning that despite their high-state-tax reputation, retirees in these states would pay 0% state income tax on their Social Security benefits . And the benefits go beyond just paying zero tax on Social Security income: Because Social Security is subtracted from the taxpayers taxable income, that means in states with progressively higher tax brackets as income increases that more of the taxpayers other, non-Social Security income will be taxed at lower rates, further reducing the overall tax burden!
Though not included on the list above, Nebraska has passed a law that will phase out state taxation of Social Security benefits entirely by 2025.
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