What State Has The Lowest Taxes For Retirees

States With The Lowest Personal Income Tax Rates

Only eight states have no personal income tax:

In addition, New Hampshire limits its tax to interest and dividend income, not income from wages.

Among the states that tax income, Pennsylvania’s 3.07% flat tax ranks the Keystone State as the 10th lowest in the nation for 2021.

Low personal income tax rates can be misleading a lack of available tax deductions, for example, can raise the effective rate you pay. The Retirement Living Information Center states that figuring your total tax burden, including sales and property taxes, can give you a more accurate reading on affordability, especially if you’re on a fixed income. However, these states with the lowest taxes on income can be a good place to start looking for a more affordable location.

TurboTax Tip: Personal income tax rates do not tell the whole state tax story. The states vary in their personal income tax floors, deductions, exemptions, credits, and definitions of taxable income. Sales and property taxes also affect the states affordability.

Sales Tax Takers And Leavers

If you’re a consumer, you’ll want to consider that all but four states Oregon, New Hampshire, Montana and Delaware rely on sales tax for revenue.

Of these, Alaska also has no income tax, thanks to the severance tax it levies on oil and natural gas production. 37 states, including Alaska and Montana, allow local municipalities to impose a sales tax, which can add up. Lake Providence, Louisiana has the dubious distinction of most expensive sales tax city in the country in 2021, with a combined state and city rate of 11.45%.

Factoring the combination of state and average local sales tax, the top five highest total sales tax states as ranked by the Tax Foundation for 2021 are:

• Tennessee 9.55%

Residents of these states pay the least in sales taxes overall:

• New Hampshire 0%

What Makes Pennsylvania The Best Place To Retire In

Yes, Pennsylvania offers many advantages to retirees. At almost 45 thousand square miles, Pennsylvania is one of the largest states in the country. It is also home to the city of Lancaster, which U.S. News and World Report recently ranked as the second best area to retire in the U.S. Several other cities in Pennsylvania also made the list.

Approximately 15.4 percent of Pennsylvanias population is 65 years old or older and it is home to more than 870,000 veterans. The VA Medical Center in Lebanon County, PA, located near Cornwall Manor Retirement Community, is consistently ranked as one of the best veterans health care facilities in the country. Pennsylvania is also home to 249 retirement communities.

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Maine Taxes On Retirees

• Our Ranking: Not tax-friendly.
• State Income Tax Range: 5.8% 7.15% .
• Average Combined State and Local Sales Tax Rate: 5.5%.
• Median Property Tax Rate: $1,320 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: Estate tax.

When it comes to taxes, retirees get more bad news than good news in Maine. Let’s start with property taxes that claw at your wallet: Maine’s median annual tax rate per $100,000 of home value is more than $200 above the national average. Ayuh.

The Pine Tree State, like the majority of states, exempts Social Security benefits from state income taxes. Plus, up to $25,000 per person of eligible pension income can be deducted . However, income above that threshold faces stiff income taxes.

Maine is one of a few states that do not allow cities and towns to impose their own local sales tax only the state sales tax of 5.5% is due. That’s good news. But Maine also has an estate tax. That’s more bad news.

South Dakota Taxes On Retirees

• Our Ranking: Mixed.
• State Income Tax Range: None.
• Average Combined State and Local Sales Tax Rate: 6.4%.
• Median Property Tax Rate: $1,288 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: None.

The Mount Rushmore State offers both good tax news and bad tax news for retirees. First some good news: South Dakota doesn’t impose an income tax, so Social Security benefits and other forms of retirement income get a free ride.

For some bad news, take a look at the state’s property tax rates, which are on the high side. Property tax relief programs are also limited to low-income residents.

The news is split between good and bad when it comes to sales taxes in South Dakota. On the one hand, rates are below average. However, the sales taxes have a broad reach here and include taxes on both groceries and clothing.

• State Income Tax Range: None.
• Average Combined State and Local Sales Tax Rate: 9.547%.
• Median Property Tax Rate: $685 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: None.

Retirees in the Volunteer State will be singing “Rocky Top” all the way to the bank, thanks to a low overall tax burden in the state. Tennessee has no income tax, though the state used to levy a 1% tax on stock dividends and interest income from bonds and other investments before 2021 .

Property taxes are well below average, too. The state also offers some property tax relief programs for income-qualified senior citizens.

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Pennsylvania Retirement Taxes And Perks

When looking for the right state to begin retirement, you may want to consider how the state taxes retirement income and savings. 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. Pennsylvania provides a tax-friendly climate 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 income tax rate is low.

Retirement income typically consists of pooling income from several different sources social security, pension, individual retirement accounts and 401s.

Is Social Security Taxable in PA?

The Social Security Agency determines if youre qualified for these benefits based on credits you earn through working. Those born in 1929 or later must earn 40 credits, or work for 10 years to earn retirement benefits from the SSA. You accumulate these credits over time. You wont lose credits during non-working periods, but you also wont gain new credits.

Does PA Tax Pensions?

Individual Retirement Account

401

Which States Have The Lowest Tax Burden

Instead of looking at tax rates, which can vary depending on your specific circumstances, the tax burden number measures the proportion of total personal income that youd pay towards state and local taxes.

To determine tax burden, we referenced Wallethubs list that compares the 50 states across three types of state tax in 2022: property taxes, individual income taxes, and sales & excise taxes.

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What Age Is Considered Early Retirement

The common definition of early retirement is any age before 65thats when you qualify for Medicare benefits. Currently, men retire at an average age of 64, while for women the average retirement age is 62. Retiring before the traditional age of 65 can feel exciting and give you something to look forward to.

Factors To Consider When Choosing The Best State To Retire In

When choosing where to retire, its wise to first consider issues like safety, access to healthcare, distance to friends and family, or living near other people of retirement age.

Make a list of features that are important to you in a retirement locale, and consider whether any of them could indirectly impact your cost of living such as being close to friends and family.

Then look at the total cost of living in an area: housing, food, transportation, cultural activities, and other expenses. These retirement expenses generally have a bigger impact on ones lifestyle than taxes.

Finally, to determine whether a state is tax-friendly for retirees, look at the following:

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State Taxes And Retirement Distributions

AARP

Taxing retirement plan distributions isn’t an all-or-nothing proposition. For example, 34 states don’t tax military retirement income. Nine of those, are the states listed above that dont have income taxes. The others: Arizona, Alabama, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Utah, West Virginia and Wisconsin. California, Vermont, Virginia and Washington, D.C. fully tax military retirement pay. All other states have partial allowances for military pay. And Virginia only allows Congressional Medal of Honor recipients to exclude their military retirement income.

Note: You may not have paid tax on your retirement income, but that doesnt mean that your state doesnt tax retirement income under certain conditions: 27 states tax some, but not all, retirement or pension income. Typically, these states limit the amount of tax by income levels.

Total Tax Burden: 823%

Nevada relies heavily on revenue from high sales taxes on everything from groceries to clothes, sin taxes on alcohol and gambling, and taxes on casinos and hotels. This results in a state-imposed total tax burden of 8.23% of personal income for Nevadans, the second-highest on this list. However, it still ranks a very respectable 22 out of 50 when compared with all states.

That said, the high costs of living and housing put Nevada near the bottom when it comes to affordability. The state ranks 37th on the U.S. News & World Report Best States to Live In list.

Nevadas spending on education in 2019 was $9,344 per pupil, the fourth-lowest in the western region of the U.S. One year earlier, in 2018, the ASCE gave Nevada a grade of C for its infrastructure.

In addition to receiving an F grade from the Education Law Center in 2015, Nevada was also the worst state overall in terms of the fairness of its state school funding distribution. Nevadas healthcare spending in 2014 was $6,714 per capita, the lowest on this list and the fourth-lowest nationally.

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California Taxes On Retirees

• Our Ranking: Tax-friendly.
• State Income Tax Range: 1% 13.3% .
• Average Combined State and Local Sales Tax Rate: 8.82%.
• Median Property Tax Rate: $742 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: None.

California can be a difficult state to figure out when it comes to taxes on retirees. For instance, at 13.3%, the Golden State has the highest income tax rate in the country but that rate is for millionaires. For middle- and lower-income folks, the rates are much lower. And while California doesn’t tax Social Security income, most other forms of retirement income are fair game.

Sales taxes are relatively high, but the state’s median property tax rate is not. In the end, when you balance out all the pros and cons, California is actually a good state for most retirees when it comes to taxes, thanks mainly to the reasonable income tax rates for ordinary seniors.

• State Income Tax Range: Flat 4.4%
• Average Combined State and Local Sales Tax Rate: 7.77%.
• Median Property Tax Rate: $505 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: None.

When it comes to property taxes, not only does Colorado have one of the lowest median tax rates in the country, but seniors may qualify for an exemption of up to 50% of the first $200,000 of property value. Other property tax breaks may apply, too.

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

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Estate And Inheritance Taxes

Another type of tax that is of particular importance to retirees is the estate tax. In recent years, legislatures across the U.S. have either repealed their state estate taxes or have increased the local estate tax exemption. For reference, the estate tax exemption is the limit below which estates do not owe taxes.

The federal estate tax exemption has increased over the years to $11.7 million in 2021 and $12.06 million in 2022. Of the 12 states and Washington, D.C. that have their own estate tax, seven have an exemption of $4 million or less. Massachusetts and Oregon have the lowest exemption at $1 million.

Similar to the estate tax, an inheritance tax affects property that’s passed on to loved ones. The tax applies not to the estate itself, but to the recipients of the property from that estate. For example, if you receive $1,000 as an inheritance and are subject to a 10% inheritance tax, you would pay $100 back in taxes.

Six states have an inheritance tax. Of these, one state also has an estate tax. Inheritance taxes typically provide exemptions or lower rates for direct family members, while fully taxing non-relatives.

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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District Of Columbia Taxes On Retirees

• Our Ranking: Most tax-friendly.
• State Income Tax Range: 4% 10.75% .
• Average Combined State and Local Sales Tax Rate: 6%.
• Median Property Tax Rate: $575 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: Estate tax.

From a tax standpoint, Washington, D.C., is a good place to retire . This is especially true for middle- and lower-income retirees. Although the District exempts Social Security income, most other forms of retirement income are taxed by the city. But many senior homeowners can get a substantial income tax credit based on the property taxes they pay.

And speaking of property taxes, the median property tax rate in D.C. are the eighth-lowest in the country. The city also offers property tax breaks designed just for seniors. Sales taxes in the Nation’s Capital are modest, too.

The District of Columbia does impose an estate tax, though.

• State Income Tax Range: None.
• Average Combined State and Local Sales Tax Rate: 7.01%.
• Median Property Tax Rate: $859 per $100,000 of assessed home value.
• Estate Tax or Inheritance Tax: None.

The Sunshine State is the quintessential retirement state. Theres no getting around its very popular with retirees, not just because of its forgiving climate but also because it has no state income tax. Sales taxes, though, can go as high as 8.5%, depending on where you live. The average combined state and local sales tax rate is 7.01%, which is about average.

Total Tax Burden: 819%

The Lone Star State loathes personal income taxes so much that it decided to forbid them in the states constitution. Still, because infrastructure and services must be paid for somehow, Texas relies on income from sales and excise taxes to foot the bill.

Sales tax can be as high as 8.25% in some jurisdictions. Property taxes are also higher than in most states, the net result of which is a total tax burden of 8.19% of personal income. Nevertheless, Texans overall tax bite is still one of the lowest in the U.S., with the state ranking 19th. Texas is average for affordability at 22nd in the nation, but it was ranked 31st by U.S. News & World Report on the Best States to Live In list.

Texas spent $9,827 per pupil on education in 2019, ranking it below average among the 17 Southern states, and it received a D grade for its school funding distribution in 2015. In 2021 the ASCE awarded it a grade of C for its infrastructure. Texas spent $6,998 per capita on healthcare in 2014, the seventh-lowest amount in the U.S.

One advantage of living in a no-tax state is that the $10,000 cap on state and local tax deductions imposed by the Tax Cuts and Jobs Act will likely not have as great an impact as it does on residents of high-tax states, such as California and New York.

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