The Best and Worst States for Retirement Taxes

Florida isn\'t just an attractive retirement destination for its climate, it\'s also very tax friendly.

Finding the perfect place to retire is more than floor plans, amenities, and weather. While these are important factors to a happy and successful retirement, when it comes to finding the best states to retire, taxes in the state you choose could play a bigger role than you think. Since retirement taxes by state vary, your budget can stretch further in some locations than others. 

According to an October 2017 survey by the Nationwide Insurance Retirement Institute, 37 percent of retirees do not take tax rates into consideration when they are preparing to retire. With many retirees living on a fixed income, they could be losing out on money, giving a lion’s share of their retirement income to taxes.

Many retirees simply do not understand the ins and outs of taxes after they retire, and therefore don’t know which are the most retirement friendly states. In fact, the survey also showed that over half of the respondents (both recent and future retirees) said that they wished they had a better understanding of the topic.

Sources of Retirement Income

For most retirees, Social Security serves as a primary source of income. Pensions are also used, but not all employers offer them. Annuities, IRAs, mutual funds, stocks, and savings accounts can also provide funds.

Not all retirees have enough savings to live carefree lives, and many have to live on limited incomes. Many active adults continue to work well after retirement age, either because they want to or out of necessity. Whether you have a nice cushion or have to struggle with money issues more than you’d like, you probably don’t want to shell out more tax money than is necessary. Certain states are more retirement-friendly than others, especially when it comes to paying taxes.

Tax-Friendly States for Retirees

Are there states that don’t tax retirement income? Yes, there are nine: Alaska, Florida, Nevada, New HampshireSouth Dakota, TennesseeTexas, Washington, and Wyoming. New Hampshire and Tennessee do tax on dividends and interest, but not on basic retirement income.

Some states without this benefit can still be retirement-friendly states, though. Many do not tax Social Security income, have low property taxes, and have tax-friendly deductions. According to SmartAsset, here are some of the most tax-friendly states for retirees:

1. South Dakota

South Dakota, home to the affordable Sioux Falls, is very tax friendly to active adults. The state does not levy an income tax, meaning any form of retirement income remains tax free. When it comes to property taxes, residents can expect to pay an average of 1.3 percent of the home value annually, which is slightly above the national average.

Despite this higher rate, the state offers a couple of property tax relief programs, including delayed payment and deductions. The state’s sales tax rate of 4.5 percent is low, and municipalities generally add an additional 2 percent. Medical services and prescription drugs, two major expenses for retirees, are exempt from the sales tax.

2. Florida

Like South Dakota, Florida also has no state income tax. Even if you have accumulated savings in an IRA in a different state and then withdrew those savings in Florida, those withdrawals will not be taxed. The state’s average property tax rate is 1.02, well below the national average. Florida also offers a generous homestead exemption for primary residences, which exempts up to $50,000 of the home’s assessed value from property taxes.

In addition, retirees can qualify for an additional $50,000 exemption. In terms of sales taxes, the statewide rate is 6 percent, while counties range from 0 to 2 percent in addition. These rates are average for the U.S., and they do not apply to groceries or medicine.

3. Georgia

The Peach State does not tax Social Security benefits, and it also offers a deduction of $65,000 on all other taxed retirement income for active adults above the age of 65. Not only is the state’s average effective tax rate only 0.91 percent, but the state offers a double homestead exemption aimed at retirees.

In addition, Georgia offers a tax relief program that keeps your property taxes steady even if your assessed home value increases. Retirees should consider a statewide sales tax of 4 percent and understand that jurisdictions can add up to 4 percent of their own taxes.

4. Nevada

In addition to no state income tax, meaning any and all retirement income remains untaxed, Nevada’s effective property tax rate is very low at 0.77 percent. Though there is no property tax relief program aimed at retirees in particular, there is a veteran’s exemption as well as a surviving spouse’s exemption.

The statewide sales tax rate is 6.85 percent, and the average combined rate is 8 percent. Though this is above the national average, there are several exemptions, including prescription drugs, durable medical equipment, groceries, and newspapers.

5. Wyoming

Another state without income tax, Wyoming has some of the lowest tax rates around. The average effective property tax rate is only 0.61 percent, and there is a rebate available that is specifically aimed at retirees. Sales taxes are also low at 5.4 percent, and groceries are exempt, which helps to balance out the high food costs in the state. Prescription drugs and medical equipment are also exempt from sales tax.

In addition, adults age 65 and older who meet certain income requirements may be eligible for the Tax Rebate to Elderly and Disabled Program, which provides a refund from the Wyoming Department of Health on property tax, utilities, and sales/use tax.

6. Pennsylvania

One of the only states on this list that does levy a state income tax, Pennsylvania does not tax Social Security benefits, IRAs, 401(k)s, private and public pensions, and all other forms of retirement income for retirees above the age of 60. The effective average property tax rate of 1.55 percent is high, but retirees can qualify for a rebate as well as a state property tax reduction.

Pennsylvania has a low sales tax rate of 6 percent, exempting clothing, groceries, prescription drugs, and residential fuels. Retirees should note that the state still does have an inheritance tax.

Worst States for Retirement Taxes

There are some states that may not provide all the ingredients for a happy retirement. Those that have little or no retirement tax advantages are worth discussing here.

1. California

California may not tax Social Security benefits, but it fully taxes all other forms of retirement income at some of the highest rates in the country. The average sales tax in the state is also very high at 8.25 percent.

Property tax rates, on average, are low at 0.79 percent, but high home costs tend to offset this low rate. There are property tax relief programs aimed at retirees, though. Residents who plan to sell any investments may think again; the state levies a capital gains tax against long-term investments.

2. Vermont

Unlike many states, Vermont taxes Social Security benefits as well as other forms of retirement income at rates ranging from 3.35 to 8.75 percent. The state also has some of the highest property taxes, averaging 1.78 percent. Vermont does offer a homestead property tax adjustment to help provide some relief to retirees.

Sales taxes, averaging 6.18 percent, are similar to the national average, and for any retirees planning on leaving a portion of their estate to their relatives, the state will levy a tax against that.

3. Minnesota

The North Star State’s income tax affects all forms of retirement income, including Social Security benefits. The rate ranges from 5.35 to 9.85 percent.

Property taxes are similar to the national average at 1.17 percent, and there is a tax relief program for qualifying retirees. This Midwestern state also has high sales taxes, its average rate being 7.3 percent. Like Vermont, Minnesota also has an estate tax.

4. Connecticut

The northeast is a popular retirement destination for its scenic beauty and all four seasons, but be prepared to pay some hefty taxes. Social Security benefits are not taxed as long as your income is below $60,000 ($50,000 for single filers). Above that, Social Security and all other forms of retirement income are fully taxed at rates ranging from 3 to 6.99 percent.

In addition, Connecticut’s average effective property tax rate is 2.02 percent, which combined with the state’s high home costs, can really dig a hole in the pocket of retirees. The state has a flat sales tax rate of 6.35 percent, and it levies an estate tax.

5. Rhode Island

This small state packs a big tax punch. All retirement income, whether Social Security or pension, is fully taxed with rates ranging from 3.75 to 5.99 percent.

Property taxes are also high, averaging 1.65 percent. Though there are some property tax relief programs aimed at retirees, home costs in general are often much higher in the state, making the high tax rate seem even higher. The state levies a 7 percent sales tax as well as an estate tax.

Finding the Right Balance

Many retirees may not be able to pick and choose what state to retire in, so it makes sense to factor in retirement taxes by state before making a decision. Housing costs, being near family and friends, availability of good health care, weather, low crime rates, and nearby activities are all essential for a high quality of life.

You may also be able to get more for your housing dollar in a state that is moderately tax friendly to retirees. For most, it is about finding the right balance for long-term, stable happiness.

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