Finding Your Most Tax-Friendly State for Retirement: Part 1

Category: Financial and taxes in retirement

April 15, 2013 — For a significant percentage of retirees, finding a tax-friendly location to retire is very important. But, while indeed there are many states and localities that are very tax friendly, making a decision based simply on someone’s list of low tax states could lead you to a poor choice. Tax friendliness varies considerably by state and locality, and how your personal situation interacts vs. those taxes has a huge impact. This is Part 1 of a 2 part series: In this article we will explore the various kinds of taxes that might affect you as a retiree; Part 2 is “Finding a Tax Friendly State for Retirement: A Checklist“, and it features a helpful checklist for you to evaluate your tax situation vs. states you might be considering for retirement. See also this MarketWatch article on “Tax Friendliest States” for a slightly different perspective.

Major Taxes in Retirement
The major state taxes you need to be concerned about are property taxes, income taxes, sales taxes, estate and inheritance taxes, and how your pensions, IRA distributions, and social security will be taxed. All of these factors need to be considered together for your particular situation. You should also be concerned about local differences – cities in many states (e.g.; New York City) charge significant sales and income taxes beyond what the state levies, and property taxes can vary within a state. This article is meant as general guidance – it is not meant to be a definitive statement on exactly how all of the states tax all of these components – there are way too many states and they change their rules too frequently!

Income Taxes. There are 7 states that have no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire only tax certain amounts of dividend and interest income. Income tax rates (and marginal rates) in the rest of the states can differ widely. For example in California the marginal tax rate is 8% for incomes above $46,766, and 10.3% above $1 million, whereas PA has a flat tax rate of 3%.

Property Tax. Property tax is often the the most burdensome one for retirees. These taxes are based on the worth of your home, but they bear no relation to your income or ability to pay. Take the example of Warren Buffett, reportedly the 3rd richest man in the world. He lives in the same house he bought for $31,500 in 1958 (now appraised at $700,000). The City of Omaha collects the same amount of property taxes on that home as from any other similarly valued house – even if owned by a retired person who is living on a vastly smaller income.

Most, but not all, southern states have low property taxes, whereas the old industrial states of the northeast and midwest tend to have high property taxes. Louisiana has the lowest and New Jersey the highest property taxes in the nation. For example as reported by tax-rates.org for 2012-2013, the median property tax paid in Louisiana was $243 (.18% of appraised value), whereas in New Jersey it was $6,579 (1.81%). Of course the value of homes is much higher in New Jersey, as is household income. Some states have ambitious programs to try to protect seniors and others from exorbitant property tax increases. California is one of those. Florida’s Save Our Homes law is extremely popular – it limits increases in the appraised value of primary homes owned by permanent residents to the cost of living or 3%, whichever is less.

Taxation of pensions. This area of taxation is extremely complex and all over the map, depending on the source of the pension and where you decide to live. Particularly if you are going to receive a sizable pension, it can have a big impact on your finances. Many states exempt some or all federal, state, and local government pensions from state income taxation – those include Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Mississippi, New York, and Pennsylvania (plus, see above for the 7 states that have no state income tax at all). In Michigan these exemptions are being phased out; whereas Georgia is going in the opposite direction – it will gradually phase out taxation of pension and social security income. More than half of all states exempt all or most income from military pensions. Five states allow no exemption for pensions of any kind: California, Connecticut, Nebraska, Rhode Island, and Vermont. Caution: the states frequently change their rules on pension taxation. Before you make a retirement decision based on this factor, check with the individual state tax website as well as a qualified professional. Here is a link to a CCH chart with capsule summarizes of state by state taxation of social security and pension income.

Distribution of 401k and IRAs. This can be a very important taxation consideration for retirees who have significant balances in these accounts. Unfortunately, state taxation of these distributions is often overlooked. In the year after you turn 70 and 1/2 you must start taking Minimum Required Distributions from your IRA or qualified employee plan such as a 401k. The amount you must take out each year is based on your remaining life expectancy. The required IRS distribution percentage starts at 3.65% at age 70 and goes to 15.87% at age 100. These distributions are treated as ordinary income for federal purposes, but their treatment can vary by state. The majority of states with income taxes include these distributions as income, whereas some like Pennsylvania exclude it.

Taxation of Social Security. The majority of states do not tax social security income. Thirteen states tax either part or all social security payments. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, West Virginia, and Utah.


Sales Tax. There are big differences between states, with some charging none at all (Alaska, Delaware, Montana, New Hampshire, and Oregon) – while others have whopping tax rates. Some states exempt food and clothing, others do not. Many counties and municipalities, such as New York City, tack on their own sales tax.

Estate and Inheritance Taxes. As of July 1, 2013 there will be 12 states that have estate taxes on top of the federal estate tax. A few other states have inheritance taxes (paid by your heirs on what they receive from your estate). Some states, such as New Jersey, have both. See the Topretirements article, “Best States to Die In” for more details.

Bottom Line
As you can see some states are more tax-friendly than others. But the answer for you might not be as simple as a list of the lowest tax states – you need to evaluate your particular situation for the states you are considering. For example, if you have a military pension, you might want to consider a state that won’t tax it – all other things being equal. But if you have no income other than social security or an exempt pension, then relax – an income tax is of no bearing to you. A state might have low taxes for working age people, but not necessarily for retired folks (or vice versa).

In general the states with the lowest overall state tax burdens for retirees are:

Alaska
Alabama
Florida
Nevada
Pennsylvania
Tennessee
Wyoming
South Dakota

Taxes are not always the whole story though. Consider Alaska, which has almost no taxes and actually pays residents an annual dividend to live there. But, because it is so cold and remote, Alaska is one of the most expensive places you can live. Family and friends should be more important than taxes. If your children and friends live in a high tax state, moving far away from them just to save money on taxes might make you miserable.

Watch for Part 2: 10 Considerations to Keep in Mind When Choosing a Low Tax State for Retirement

For further reading
Finding a Tax Friendly State for Retirement: A Checklist
20 Most affordable Places to Retire
Topretirements state retirement guides
IRS Minimum IRA Distribution Worksheet
Retirement Friendly States: These States Want You to Retire There

Comments? What is your experience with state taxes and your choice of where to live in retirement? Please share your thoughts, goals, and experiences on this topic in the Comments section below.



Posted by Admin on April 15th, 2013

28 Comments »

  1. I have always advised people I know considering retiring to another state to fill out the tax returns for that state, based upon your projected retirement income, to determine how much exactly it will cost you to live there. I am simply amazed at how many retire’s have never considered doing this. When My wife and I were considering S.C., N.C. and Florida, we downloaded the state tax forms and filled them out. What a surprise to find out that Florida was cheaper than both states by several thousand dollars.

    The results may not change your mind or make a difference, but at least you will know what the tax bite on your retirement income will be…

    by Russ — April 16, 2013

  2. Please do your research on GA. In 2011 no tax on retirement income up to $60,000 and earned income up to $4,000. 2012 that increased a LOT… Also, many counties have reduced senior property tax sifgnificantly, as in NO school tax…this cut our tax on a $300,000 home in Cherokee Cnty. to about $800 from $3,000, and in Forsyth, to about $900. Check with the individual county. On state income tax alone, we save $3200. over VA… Plus over $2,000 in property tax. Not a bad savings! I think they will beat FL once the TRUE word gets out!

    by Betsy — April 17, 2013

  3. Please be aware that Vermont property taxes are based on income.

    by Barb — April 17, 2013

  4. I couldn’t agree with the 2 above posters more. Do your homework before you jump to a state that, tax wise, looks good. We bought a condo in SC and the state sales tax rate is 6%. However, each city/town has the option of increasing that tax as did Myrtle Beach. MB charges a sales tax of 9% on everything – clothes, food, etc. They have also implemented an “admissions” tax on rounds of golf, amusements, etc. They also raised their dine out tax on food to 11% or 11.50%. Drinks are a whole other set of taxes. That can range from 11% – 16.5% per drink. North Myrtle Beach has a sales tax rate of 9% on everything and there have been rumblings of raising it to 10%. About the only good thing is that once you reach 65 and live in an owner-occupied home you receive a pretty good tax break on property taxes. Check with your insurance companies for ballpark figures regarding house insurance (can be really expensive) and car insurance which can also be very expensive – a tremendous amount of people drive with no insurance and/or no license. Also, if you have any health issues check out the hospital facilities and make sure they are up to your standards. Food at the grocery store is very expensive. I can’t stress enough that these are things you must check out first. Thankfully this was only a second home so as soon as we sell the house in MA we’ll buy in FL and sell the condo in SC. Oh, and please remember that if you do decide to move to SC it is a non-disclosure state when it comes to buying a home/condo/etc. so make sure you get it inspected by a qualified home inspector.

    by Kathie — April 17, 2013

  5. I forgot to add that your vehicles are considered “real” property and are taxed that way. You do not get any tax break on them and there is no yearly vehicle inspection. However, the prices for new tires are really high since most people just buy retreads and stick them on their car. I got 4 new tires in MA for $420 (tires/balancing/installation). The same tires in the MB/NMB area would have cost me $900 and that was without adding on the cost of installation and balancing. It doesn’t sound like much but if you’re living on social security and maybe another form of monthly check then $900 is still a pretty big chunk out of your account.

    by Kathie — April 17, 2013

  6. Don’t go to Wyoming! Awful place. Brutal winters. Little rain, nothing is green. No … don’t go there ……….. because I’m still five years away from retirement and don’t want everybody moving there and ruining the place. 😀

    by Steven — April 17, 2013

  7. Kathy, I think you exaggerate a bit on the tires. Most people buy retreads? Please…… I think your Northern bias is showing. I bought tires in Myrtle Beach in March and the price was the same as I would have paid in Wilmington, NC, where I live and in Ohio where I spend a fair amount of time.

    I find food at grocery stores no more expensive than at home.

    by Dick — April 17, 2013

  8. We vacation in Pawleys Island, just 30 minutes south of Myrtle Beach, each year. The cost of food IS high…even in grocery stores…but you have to keep in mind that it’s a resort area. Everything will be more expensive. Food costs (and other costs) are less if you travel inland, but state taxes are generally the same.

    Also, we recently sold a rental condo in Pawleys Island. Each year, SC taxes you on the value of the furniture in the rental if the rental is furnished, as well as the value of your car.

    by John — April 17, 2013

  9. Pension information here is incorrect? I love these articles, but I am dismayed when I see what appears to be incorrect information. Regarding income taxes on pensions, I know for a fact that KY exempts nearly $45K of federal pensions, and CO and IN also exempt up to about $20K of federal pensions according to their websites. When these articles are written, is there any research done on the states’ current rules, or is the information on the states’ websites incorrect?

    by Char — April 17, 2013

  10. We lived in SC for 12 years, and my job took me to every part of the state. RE taxes were incredibly reasonable as were the personal property taxes on vehicles. On a new car you only pay $300 in sales tax. Costs are definately higher in a vacation area, but in the rest of the state they are no different than where we are now in TX.

    by Richard — April 17, 2013

  11. I live in Florida and of special consideration, besides taxes, is the cost of homeowners insurance which is through the roof, provided you can get it.

    by Judy — April 17, 2013

  12. Note to those questioning the research going into this article. This article is meant as general guidance to help you start your thinking process – it is not meant to be a definitive statement on exactly how all of the states tax all of these components – there are way too many states and they change their rules too frequently!

    Regarding GA, the income income exclusion is $65,000 in 2012 if you are 65 or older, with the $4000 Maximum earned income. The rather complicated instructions are located on https://etax.dor.ga.gov/inctax/2012_forms/TSD_Form_IT511_Instructions_TY%202012.pdf

    As an example of how complex the various state laws are, here is what we just copied from the KY tax website concerning Pension Income exemption mentioned above:

    Complete this schedule and file with Form 740, 740-NP, or 741 if:
    1.your taxable pension and retirement income from all sources is
    greater than $41,110
    ; and
    (a)
    you are retired from the federal government, the Commonwealth of Kentucky or a Kentucky local government; or
    (b)
    you receive supplemental (Tier 2) U.S. Railroad Retirement Board benefits.

    Editor’s note: In other words if you receive a pension from a private company or state other than KY, it is not exempt. And, as far as we could tell, you have to be very alert to this exemption to take it – the regular KY tax form doesn’t seem to mention the form referenced above. Which takes us back to our main point – research your state tax situation very carefully before you decide anything – if taxes are a big driver for you. We agree strongly with Russ’s excellent suggestion above – if taxes are important to you hire a CPA to prepare a draft tax return for your new state before you move there – it’s the best way to really know!

    by John Brady — April 17, 2013

  13. Russ’s idea is a good one. I guess I have to say that because simply grabbing a tax form and instructions from a state one is considering…and filling it out is exactly what I do and recommend. I don’t stop there. I have a spreadsheet with costs (for different locations we’ve considered) for property tax, state income tax, utilities, auto insurance and homeowner insurance.

    General guides are just that. One’s source of retirement income is so important. For example, thanks to the Bailey exemption, as a federal retiree with 5 years of service prior to August 12, 1989, I wouldn’t have to pay state income tax in North Carolina. In Oregon, I would only pay state income tax on the percentage of my career after Oct 1991. In my case, that would mean 50% of my pension would not be taxed. That’s a good thing, as Oregon state income tax rates are rather high…though mitigated by a lack of sales tax.

    Bottom line is finding a balance between overall cost of living and where you want to live. There is no way I would move to a low-tax haven if I really didn’t want to live there. But…on the other hand…I would definitely get up and move to a place I was interested if it’s affordable for my wallet. We all have to do our own homework with our specific considerations and criteria in mind.

    by Chuck — April 17, 2013

  14. Go to http://www.retirementliving.com/taxes-by-state; click on any state on the interactive USA map to find out every tax (right down to diesel vs gasoline tax; other states’ pensions tax) in that state. retirementliving.com also has an everything menu for retirees – jobs, bookstgores, aging agencies…

    by Old Nassau — April 17, 2013

  15. That’s a good resource. As you might expect, it doesn’t tell the whole story. For example, while it gives the correct rule of $51k for maximum AGI in which any exemption of income for those age 65 and older can be taken, one still has to go to the New Mexico tax instructions and look at a table to see how much of an exemption they will get.

    By the way…there are 5 states listed (above) that do not exempt any portion of pensions from state tax. New Mexico is not listed. But…as far as I can tell, the only possible exemption is for people over the age of 65 with an AGI less than $51k…and the maximum exemption is $8k for AGI’s under $30k. This exemption is based totally on income with no considerations for the source (e.g. pensions).

    by Chuck — April 17, 2013

  16. The only taxes I am subject to pay are property taxes, and excise taxes on tires, utilities and tv entertainment. I don’t pay income tax because I don’t make enough after mortgage, medical and age deductions. There is no sales tax in Oregon. If I work, there is Social Security and Medicare to pay.

    Oregon is a Democrat state, and on that basis alone, I do not recommend moving here. Unemployment is high, and if you want to subsidize your income, well, good luck with that. Work for seniors is tough to find. I found something nobody else wants to do, but it suits me just fine.

    If you are a high income investor, Oregon isn’t for you. The legislature just passed a tax to take more income from you. California isn’t for you either. If you like the NW, Washington may have some appeal, but you’ll pay sales tax, unless of course, you sneak stuff from Oregon to Washington. You won’t get away with it on cars, trucks or RV’s.

    Arizona and Nevada have some appeal for me because the weather can be more temperate. You have humidity in Florida, and I can’t deal with that along with the storms. That’s my 2 cents, tax free.

    by Edward — April 18, 2013

  17. While Wyoming does have a low tax burden. No income tax,fairly low property tax and no sales tax on food. House prices are more expensive when compared to other retirement areas. The Summer here is about as nice as it gets. The Winter on the other hand can last forever. As I write this I am currently drifted in with snow, most of the roads have been closed off and on for the last couple of days. So if you like wind and snow for 6-8 months Wyoming is for you. Looking towards retirement in the next few years and I know Florida is for me.

    by Bill — April 18, 2013

  18. A quick note on sales tax in Alaska. While there is no state sales tax in Alaska, municipalities may impose a sales tax. At work I have had to deal with the sales taxes in Dutch Harbor and Unalaska, but those are probably not retirement destinations (unless you are a walrus). Fairbanks and Anchorage appear not to have sales taxes, but Juneau, the capital, imposes a 5% sales tax.

    by Greg — April 20, 2013

  19. I don’t understand where the authors got that the property tax was lowest in AL (.33). According to taxrates.org (the link they provided), in LA it’s only .18, and in HI it’s only .26. Obviously the homes are cheaper in LA than they are in HI. TX has one of the highest rates at 1.81, but the homes are very cheap there. There’s a lot more math involved here than meets the eye.

    Editor’s note: Thanks for the correction Bootsy, you are absolutely right. LA and HI both have lower taxes as a % of home value than AL as you say. We missed that. LA also has the lowest median property taxes paid ($243) vs. $398 in AL. Hawaii, where property values are sky high, has a much higher median tax paid ($1324). We will correct the original article.

    by Bootsy — April 23, 2013

  20. […] further reference: Finding Your Most Tax Friendly Retirement States for Retirement 7 States to Avoid Most Tax-Friendly States What do you think? Please use the comments section below […]

    by » Best States to Die In (but it’s not a good year to do it anywhere) Topretirements — April 28, 2013

  21. […] This is part 2 of our Most Friendly Places for Retirement series, here is the link to “Part 1: Finding Your Tax Friendly Place for Retirement“. In this article we will discuss some of the key tax issues that affect retirees, as well as […]

    by » Finding a Tax Friendly State for Retirement: A Checklist Topretirements — April 30, 2013

  22. Colorado does have an exempt amount for State Income Tax on pensions. However, the rest of the state is still expensive. I’m semi-retired with a small business providing a service. I’m looking for find the perfect state to fully retire in. I don’t think Colorado is it.

    by Maggie — May 1, 2013

  23. Betsy
    I found your information very informative.
    What are the areas/communities in Ga for retirement that you are familiar with and would recommend?
    Marilyn

    by Marilyn — May 2, 2013

  24. Definitely don’t retire to Illinois – especially the Chicago area. Winters are long and messy and summers are short, hot and unpredictable. One summer may be fantastic, and the next two or three will be too dry or too wet! Property taxes are high, sales tax one of the highest in the nation, the state can’t help but try and find new taxes to pay for all the state employees and union workers pensions! Can’t wait to get outta here, I know Lake Michigan is beautiful, but that’s not enough to keep me in the corrupt, expensive state.

    by jon — May 2, 2013

  25. Ga goes to $200,000 in 2013, unlimited as of next year as I understand it. Will become a well to do senior state I predict.

    by Donna Neese — May 2, 2013

  26. Marilyn,

    I am not Betsy but have checked out northern GA for retirement. We love it. Winters are not too cold and summers are not too hot, lots of places to be active outdoors, including beautiful rivers and lakes, waterfalls to hike to. But it really depends on what you are looking for. Gainesville GA has decent medical providers, as we found out when Dad ran into health problems and his doctor sent him there.

    With a son at Georgia Tech, we checked out Atlanta with the idea of buying a condo for him to use now and for us later, but crime is way too high for our preferences, and I suspect water supply is going to be an issue long term. Housing seems to be slow to rebound. GA has been hard hit by foreclosures and there is a lot of very good values to be had. Can’t tell you anything about retirement communities, if that is what you are looking for.

    I am looking forward to getting time to explore this state more closely. Right now it is just too far for us to consider until DH leaves the rat race.

    by Julie — May 3, 2013

  27. Julie
    Thank you for the information. I don’t think we want a 55+ community but we really haven’t looked at them, other than the Villages in Fl and that did not appeal to us. I will check out Gainesville.
    Marilyn

    by Marilyn — May 3, 2013

  28. […] further reading: Best and Worst Things about Retirement: Our Members Speak Finding Your Most Tax Friendly State for Retirement (a 2 Part […]

    by » 5 Thoughts on Why Taxes Are the Worst Reason to Pick a Best Place to Retire Topretirements — December 29, 2013

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