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Answer: Other than saving you money, moving to a state with no income tax can save you time and stress come tax time. However, some states without income taxes may have high sales taxes, high cost of living, or infrastructure issues. Be sure to research your options to determine what’s best for your financial situation.
Unfortunately, retiring doesn’t always mean you can stop worrying about taxes. Depending on the source of your income, you might still have to pay both federal and state income tax.
Does this mean you should move to a state with no income tax when you retire? Let’s weigh up the pros and cons.
Which States Have No Income Tax?
The majority of states levy income tax at the state level. However, some states do not. Here are the states with no or limited income tax:
- Alaska – none
- Florida – none
- Nevada – none
- South Dakota – none
- Tennessee – none
- Texas – none
- Wyoming – none
- Washington – income tax only on capital gains and investments and only on earnings in excess of $250,000.
- New Hampshire – no income tax on earned income. Income tax on investments and interests is being phased out and will be gone by 2027
So, should you move to one of these states? The obvious advantage is not having to pay state income tax. Bear in mind that Social Security benefits may be taxable.
Advantages of Moving to a State With No Income Tax
Other than the big advantage of not having to pay state income tax, what are the perks?
- Save time and money come tax time. Not having to pay state income tax also means not filing a state income tax return. Most tax preparers and tax software programs do charge extra for state returns. If you do your taxes by hand, it can save a lot of time.
- Avoid tax on certain retirement accounts. If you have a 401(k), IRA, or individual retirement account, you could deduct that from your taxes. In theory, you then pay the tax when you withdraw that money. If you move to a state with no income tax, then you avoid ever paying tax on that income. As a note, three more states exclude distributions from these plans from taxation—Illinois, Mississippi, and Pennsylvania. This is worth considering if you expect this to be your primary income.
The primary advantage, though, is avoiding income tax. If you’re still working part-time or doing anything else that earns income in retirement, such as selling art or writing a book, you can save a lot of money. And if you choose a state that also doesn’t tax interest and dividends, you can save a lot of money.
Disadvantages of Moving to a State With No Income Tax
There are, however, some disadvantages to choosing to move to one of these states:
- States that do not charge income tax still have to make money. This often means that states with no income tax have higher sales tax and higher property tax. If you plan to buy a valuable property, you could pay quite a bit more. Another way they might choose to make money is by increasing the enforcement of traffic violations or raising fines. For example, Nevada has a state sales tax of 6.85% and an average local sales tax of 1.38%. “Sin taxes” may also be higher, meaning you pay more for cigarettes, alcohol, etc.
- Some of these states have a higher cost of living. Alaska, for example, has the sixth highest cost of living in the United States, in part because the climate requires a lot of food to be imported from further south. You may save on state income tax, but then spend more on general expenses such as groceries and clothing.
- Some of these states have issues with infrastructure. South Dakota, for example, has 17% of its bridges rated as structurally deficient. Tennessee is also known for poor infrastructure. While Wyoming has good infrastructure, it has low population density, meaning a higher distance to services such as hospitals.
But the biggest disadvantage is that you will be paying higher taxes in other areas, unless you move to Alaska, which is funded strongly by mineral leases and has the lowest tax burden. Unfortunately, the state makes up for it in cost of living.
Other Things To Consider
We tend to focus a lot on finances. If you’re considering retiring to a state with no income tax, make sure you aren’t ignoring other considerations, such as distance from family or climate. Florida, for example, is very popular for retirees because of having an income tax, and the state has pleasantly warm weather that can make aging bodies more comfortable. Nevada is also pleasantly warm. Washington, however, gets a lot of rain. Wyoming and South Dakota have low population densities, which can mean more time spent traveling for essential services.
Another thing to consider is whether you will be comfortable in the society and culture of the state. All states have some differences in their local culture and attitudes. States that don’t charge income tax tend to lean more conservative in other ways.
So Which States Are Best for Retirees?
The short answer, of course, is “It depends.”
The longer answer is that it really depends primarily on your income or expected income during retirement. If you have a lot of high-value investments or a lot of money in a 401(k) then you may benefit a lot from moving to one of these states. Also, if you’re primarily reliant on social security (which many states don’t tax), then you may actually be better off avoiding them.
If you plan on spending a lot of money on a very nice house in retirement, then property tax may be more important to you. However, if your plan is to sell your home and move to a 55+ community, then you may well benefit more from choosing one in a state with no income tax. As with many things, it’s a good idea to talk to a financial advisor about your plans.
There’s no simple answer as to whether it’s best to move to a state with no income tax when you retire. It depends on your income, the value of the property you intend to buy, and, of course, on non-financial factors such as the location of your family or your personal preferences as to climate and culture.
For help finding your dream home in a 55+ community, reach out to the team at 55places.
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