5 Tax Friendly Retirement States

by Susan Quilty on April 28, 2010

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Del Webb's Lake Providence in Tennessee is a popular 55+ community known for its amazing amenities, elegant homes and fantastic state tax benefits.

While searching for the best place to retire, savvy active adults begin looking for ways to stretch their savings. Choosing a tax friendly state as a retirement destination is a smart way to make the most of a fixed income – but finding the best location can take a bit of research.

Federal taxes are about the same regardless of where you choose to live. However, the amount of state and local taxes you pay can vary widely. When searching for the best place to retire, be sure to look into the individual community’s entire tax burden, including income tax, property tax, sales tax and taxes on pension plans. Many states also offer special tax programs for seniors, which can save you money after reach a certain age.

Which other tax friendly states make great retirement locations? The tax benefits from one state to another will predominantly depend on your personal financial situation. For example, someone with a military pension may prefer a state with pension-friendly tax laws. While the answer will be different from one retiree to the next, here are five states to consider:

1. Alaska
Alaskan residents do not pay income tax or sales tax, and there are government refunds due to the revenue earned from oil drilling. For those who like the Alaskan climate and lifestyle, this can be an affordable retirement destination. However, not many retirees are interested in Alaska’s harsh winters and relative isolation from the rest of the nation.

2. New Hampshire
This tax-friendly state has no general income tax or sales tax. The state relies heavily on property taxes, yet there are programs to offset these taxes for adults beginning at age 65. Like Alaska, this state’s climate does not meet the popular picture of a retirement location.

3. Tennessee
There are no broad-based income taxes in Tennessee, which means no taxes on salaries, Social Security benefits, IRA distributions or pension income. There are, however, taxes on stock dividends and interest income from investments. With rural beauty and a low cost of living, Tennessee is gaining popularity as a retirement destination.

4. Delaware
This small state is a tax friendly location for retirees. There is no sale tax and limited income taxes. Social Security benefits are exempt from state income taxes. Older residents may also qualify for special tax credits and tax relief programs.

5. Alabama
In addition to being tax-friendly, Alabama enjoys a warm climate that appeals to many retirees. This beautiful southern state offers state income exemptions for Social Security benefits, as well as military, civil service, and government pensions. There is a 4-percent sales tax statewide, however additional local sales tax rates do raise this to up to 12-percent in some areas. Residents over the age of 65 are exempt from county property taxes.

Before making the final decision on where the best place to retire is for you, be sure to research your potential tax burden and to consider state and local taxes, including specific county and city taxes. Most states provide tax information online, which makes it easier than ever to find your own tax friendly retirement destination.

Think you know of some great tax havens, tell us about it in the comments section below.

{ 6 comments… read them below or add one }

Vicki Weston May 5, 2010 at 2:53 pm

What are some web sites to go to to find info of the different states taxing?

Reply

Bill Ness May 5, 2010 at 3:32 pm

Vicki, check out retirementliving.com. They have a section that breaks it down by state.

Good luck!

Bill Ness

Reply

Alison Mullins May 6, 2010 at 12:05 pm

With the new healthcare some states have opted out. I now am paying 918/mo. It would be nice to know what state are charging for comprehensive plan. Unfortunatley I am in that nitch that was never thought about for healthcare until 2014. I like to hear tax friendly because I am relocating but if you are paying lots in healthcare it wipes out everything else if you are in the wrong state.

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Faye Washington September 1, 2010 at 2:48 pm

We live in Tennessee and there is tax on SS benifits. On the federal form, you must list your ss benefit as income. Seems unfair to tax the money twice, but there you are.

Reply

Jess Sigmund September 8, 2010 at 2:39 pm

According to your article, “5 Tax Friendly States,” Tennessee does not tax social security benefits ; however, Faye, who lives in Tennessee, says SS benefits are taxed. Who is correct?

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Kay January 14, 2013 at 7:01 pm

Faye is talking about the federal income tax form. No matter where you live in the US, everyone is taxed by the feds. for social security income. If you are single, a per son can make $25,000 or filing jointly $32,000 before you are taxed. TN does not have a state income tax which is what the article refers to.

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