Each year, Kiplinger and other financial analysts offer advice on which states are the most and least tax-friendly destinations for retirees. The criteria for these lists can vary, but they generally attempt to look at the total tax burden including taxes on income, property, sales, pension, Social Security benefits, and inheritance.
While the actual implications of tax laws in any state will depend on your own particular retirement situation, there are some states which might require a closer look before relocating. Here are our picks for states to avoid if a low tax burden is high on your list of retirement priorities.
1. Vermont
Unless you have Railroad Retirement benefits, living in Vermont will not offer any exemptions for your retirement income. Out-of-state government pensions are fully taxed, as are Social Security benefits. State sales tax is collected at 6 percent, with exemptions for food, prescription drugs, clothing and shoes priced below $110, and other items. However, local jurisdictions can add another 1 percent. Prepared foods, restaurant meals and lodgings are taxed at 9 percent, and alcoholic beverages served in restaurants are subject to a 10 percent tax.
2. Minnesota
If the cold weather isn’t enough to make older adults relocate, Minnesota’s unfriendly tax laws may drive retirees away. Pensions are subject to state income tax regardless of where they were earned, except for Railroad Retirement benefits which are exempt in every state. Social Security benefits are taxed to the same extent they are taxed on your federal return. The state sales tax is just under 7 percent, and some cities and counties can tack on their own sales tax as well. Food, prescription and non-prescription drugs, and clothing are exempt, but alcohol is taxed at over 9 percent.
3. California
Though California is often seen as a retirement hot spot, its tax laws are not friendly to retirees. Social Security and Railroad Retirement benefits are the only retirement funds which are tax-exempt. The state has one of the highest income tax rates in the country, and property is taxed at 100 percent of its full cash value. State sales tax is high and localities can add their own taxes as well, although food and prescription drugs are exempt.
4. Connecticut
Veterans in Connecticut receive a 50 percent tax-exclusion on benefits from their military pensions, but other retirees are out of luck, as the state offers no tax exemptions or credits for other retirement income. Out-of-state pensions are fully taxed, and Social Security benefits may be taxed as well, depending on your total income. Connecticut’s real estate taxes are among the highest in the country, and property is taxed at 70 percent of its full market value. Depending on their age, residents may qualify for a property tax credit or rent rebate. There is no inheritance tax, but Connecticut does impose an estate tax on estates worth $2 million or more.
5. Nebraska
While Railroad Retirement benefits are exempt in every state, they are the only type of retirement funds which are tax-exempt in Nebraska. Out-of-state government pensions are fully taxed, as are the benefits from military pensions. State sales tax is collected at 5.5 percent, with an exemption for food and prescription drugs, but localities can add another 1.5 percent. Real estate taxes are assessed at 100 percent of the property’s market value, but a homestead exemption may offer qualifying retirees a break on property taxes.
6. Oregon
Oregon is a great place to shop as there is no sales tax throughout the state. However, living in Oregon is another story. Along with Hawaii, Oregon has the distinction of having the country’s highest personal income tax rate. Oregon does not tax Social Security or Railroad Retirement benefits, but other forms of retirement income are subject to state taxes. Retirees may be eligible for a tax credit, depending on age and income. The state also has a Senior Citizen Property Tax Deferral Program for qualifying residents.
7. Iowa
On the plus side, Iowa allows retirees to exclude a portion of retirement plan distributions from their state income taxes: up to $6,000 for single retirees and up to $12,000 for married couples. That exemption does not include Social Security benefits, but the state is gradually phasing out taxes on Social Security income. Real estate owned by retirees is taxed at 100 percent of its market value, and most property is taxed by multiple taxing authorities. There are inheritance taxes on any estate worth more than $25,000, however, the surviving spouse’s share is not subject to this tax.
8. New Jersey
While New Jersey is listed among the highest in the country for real estate taxes, the state does offer some tax breaks for retirees. When it comes to retirement funds, Social Security, Railroad Retirement benefits and military pensions are not taxable. New Jersey income tax rates are high, but retirees may be able to exclude a portion of their retirement funds if they qualify for the state’s Pension Exclusion. Property taxes are very high, and the state has both inheritance and estate taxes (with some exemptions).
