Deciding Where to Retire: Finding a Tax-friendly State to Call Home
Wolters Kluwer Outlines State Tax Considerations for Retirees
(NEW YORK, NY, March 2019) — Whether you’re looking to stay put, seeking out adventure or just hoping for a warmer climate in your golden years, how much of your retirement income goes to taxes depends not just on how much income your nest egg earns, but also on where you choose to live. A little pre-retirement homework on state tax treatments of retirement benefits and other financial factors can be a key step in deciding where to establish new, post-career roots. Specific factors to consider include:
- State taxes on retirement benefits
- State income tax rates
- State and local sales tax
- State and local property taxes
- State estate taxes
Taxability of Retirement Benefits Varies State to State
Tax treatment of retirement benefits varies widely from state to state. Some states:
- Impose no income tax on retirement or other income
- Exempt all or some retirement or Social Security income
- Provide credits for retirement income
- Tax all retirement income
Currently, seven states do not tax individual retirement or other income, including Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
New Hampshire and Tennessee impose tax only on dividend and interest income.
States that exempt all retirement and Social Security income are Illinois, Mississippi, and Pennsylvania.
States that tax some retirement or pension income include: Alabama, Arizona, Arkansas, Colorado, Delaware, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Oklahoma, Rhode Island, South Carolina, Virginia, West Virginia, and Wisconsin.
Ohio, Oregon, and Utah provide a credit for retirement or pension income.
States that tax all or most retirement or pension income include: California, Connecticut, District of Columbia, Idaho, Minnesota, Nebraska, North Carolina, North Dakota, and Vermont.
States that impose tax on Social Security income include: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide limited breaks for Social Security income, often for lower-income individuals.
State Tax Retirement Income Changes
- Arizona: Increases exemption for military retirement income from $2,500 to $3,500 for tax years after 2018
- Colorado: Creates a deduction for military retirement benefits received by taxpayers under the age of 55 for tax years after 2018 and before 2024
- Kentucky: Decreases retirement and pension income exemption from $41,110 for $31,110 for tax years after 2017
- Maryland: Increases the deduction for military retirement income from $10,000 to $15,000 and lowers the eligible age for the deduction from 65 to 55 for tax years after 2017
- Vermont: Exempts Social Security benefits for married taxpayer filing jointly with adjusted gross income up to $60,000 and all other taxpayers with adjusted gross income up to $45,000. Phases out exemption for income above those thresholds. Changes tax effect for tax years after 2017
Other State Retirement Tax Considerations
- State income tax rates: Income tax rates also can have a significant financial impact on retirees in determining where they want to live. The rates can differ widely across the country:
- California, the District of Columbia, Hawaii, Iowa, Minnesota, New Jersey, New York, Vermont, and Oregon impose rates on the top income tax brackets (more than 8%)
- Arizona, Colorado, Illinois, Indiana, Michigan, New Mexico North Dakota, Ohio, Pennsylvania, and Utah impose the lowest rates (less than 5%)
- State and local sales taxes: Forty-five states and the District of Columbia impose a state sales and use tax. States with relatively high state sales tax rates include California, Indiana, Mississippi, Rhode Island, and Tennessee. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate. (View the Top 10 Highest & Lowest State Sales Taxes [Insert hyperlink to Smart Chart])
- State and local property taxes: While property values had declined for several years after 2008 in many areas, it has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary
- State estate taxes: Estate taxes also can influence where seniors want to retire. Most states no longer impose an estate tax. Others, like California and Florida, technically still have such a tax on their books, but collect no revenue because their tax is based on the now-repealed federal credit for state death taxes
Estate tax exemption amounts vary in states that continue to impose the tax. Examples of 2019 exemption amounts include:
- $3.6 million in Connecticut
- $5.49 million in Hawaii
- $4 million in Illinois
- $1 million in Massachusetts
- $5.74 million in New York
State Taxation of Retirement, Pension, and Social Security Income
State and local sales taxes: Forty-five states and the District of Columbia impose a state sales and use tax. States with relatively high state sales tax rates include California, Indiana, Mississippi, Rhode Island, and Tennessee. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate (View the Top 10 Highest & Lowest State Sales Taxes).