Deciding Where to Retire: Finding a Tax-friendly State to Call Home

2020 Whole Ball Of Tax

Wolters Kluwer Outlines State Tax Considerations for Retirees

(NEW YORK, NY, February 2020) — A variety of factors play a big role in where retirees choose to spend their golden years. These factors can include:

  • climate
  • family and friend networks
  • healthcare costs and options
  • real estate, grocery, gasoline, and other basic living costs
  • transportation options
  • relocation costs

But retirees shouldn’t overlook the impact state taxes can have on their retirement nest egg. Specific taxes to consider include:

  • State taxes on Social Security and retirement or pension benefits
  • State income tax rates
  • State and local sales tax
  • State and local property taxes
  • State estate taxes

How do states tax retirement, pension, and social security income?

Tax treatment of retirement, pension, and Social Security 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

Individuals determine income tax liability in most states by starting with their federal adjusted gross income (AGI). So, taxpayers start with the amount of Social Security income or other forms of retirement income included in federal AGI before any state adjustments.

What states do not tax retirement income?

7 states do not tax individual retirement or other income.

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

2 states tax only dividend and interest income.

  • New Hampshire
  • Tennessee

4 states exempt all or most retirement income.

  • Illinois
  • Hawaii
  • Mississippi
  • Pennsylvania

What States Tax Some Retirement Income?

27 states tax some, but not all, retirement or pension income. Many of these states limit the exemption amounts based on AGI thresholds.

  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Delaware
  • Georgia
  • 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
  • Wisconsin

3 states provide a credit for retirement or pension income.

  • Ohio
  • Oregon
  • Utah

What States Tax All or Most Private Retirement Income?

7 states and the District of Columbia tax all or most private retirement or pension income.

  • California
  • District of Columbia
  • Idaho
  • Minnesota
  • Nebraska
  • North Carolina
  • North Dakota
  • Vermont

What States Tax Social Security Income?

13 states tax some or all Social Security income. Most of these states exempt a part of this income based on AGI thresholds.

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

What states made retirement income changes over the last year?

  • Connecticut: Delayed the scheduled increase in the tax exemption for income received from the states teachers' retirement system. The exemption increases from 25% to 50% beginning January 1, 2021
  • Indiana: Phased in a deduction for all military retirement income over a 4-year period beginning in 2019
  • North Dakota: Established a deduction for all military retirement income in tax years beginning after 2018
  • West Virginia: Restored a personal income tax deduction for retirement income received under a defined plan covered by the Pension Benefit Guaranty Corporation (PBGC). Taxpayers can claim the deduction for tax years beginning after 2018 and before 2023

What are some other state retirement tax considerations?

Of course, tax treatment of retirement income isn’t the only tax consideration to think about. What a state loses in revenue by providing favorable treatment to retirement income, it can make up by relying on more revenue from:

  • higher income tax rates
  • sales and use taxes
  • property taxes
  • estate taxes
  • fees

State income tax rates: Income tax rates 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, Oregon, and Vermont 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: 45 states and the District of Columbia impose a state sales and use tax. States with relatively high state sales tax rates (7% or more) 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.)

State and local property taxes: High property taxes can strain the limited resources of retirees. Fortunately, 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 apply to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary

State estate taxes: Most states no longer impose an estate tax. Estate tax exemption amounts vary in states that continue to impose the tax. Examples of 2020 exemption amounts include:

  • $5.1 million in Connecticut
  • $5.49 million in Hawaii
  • $4 million in Illinois
  • $1 million in Massachusetts
  • $5.85 million in New York

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