Surprising Results: The Worst Retirement States for Taxes Are Not What You Thought

Category: Best Retirement Towns and States

September 6, 2011 – It’s pretty well known that some states are definitely harder on retirees than others when it comes to taxes. So we confess that when we set out to research this article on the worst retirement states for taxes, we had some pretty strong preconceptions. Most of the worst tax states would be in the Northeast, we assumed, with perhaps California thrown in for a little geographical balance. Boy were we wrong – all but 3 of the states on our list are west of the Mississippi.

First, a few caveats about our list of worst tax states for retirement. It is easy to generalize about taxes, but that would be a huge mistake. The more we analyzed the topic, the more complicated it got. To begin with, there are many different kinds of taxes: income, sales tax, property taxes (at the state and local level), inheritance, estate, and incidental taxes like those on cigarettes and gasoline. Depending on individual situations, one type of tax will have a larger impact on one retiree than it will on another. Many states have attractive exemptions for certain kinds of income (such as military or government pensions) which will be of great value to one group of retirees, but not to another. Our list is mostly based on income taxes.

To determine our rankings we used a hypothetical retirement couple (both over 65)who derives their income from a roughly equal combination of social security, (non-government) pension, and investment income. We arbitrarily did a rough computation of income taxes for 2 income levels: $60,000 and $100,000, to which we took all the standard, personal, and over 65 exemptions we could find. These income levels are obviously higher than what typical retirees earn; however our feeling was that below $60,000, income taxes are not that significant. Lastly, please remember that taxes are only one reason to select or reject a retirement state. In our opinion, there are many other, better reasons to choose a retirement state (see “What Betty and Jim Learned Looking for Their Best Place to Retire”. Lastly, see the additional list of qualifications at the end of this article.

Narrowing Down the List
Any state with an income tax makes the first cut for worst retirement tax state (there are 43 of those, although New Hampshire and Tennessee only tax dividends and interest). States that tax either all or part of social security income at the state level are certainly candidates too (most states don’t). States that tax pensions are obvious contenders. States that tax both pensions and social security are the worst places for retirement taxes, since these are two of a typical retiree’s major income sources.

The 2011 List – Worst Tax States for Retirement
The following is our list of the worst states for retirement taxes, with the priority on income taxes. The states on this list are here primarily because they do not have meaningful exemptions for social security and/or pension income. It is actually pretty obvious – if social security, pensions, and retirement income can be excluded – retirees’ taxes will be a lot lower they are for working people.

1. Minnesota
The approximate income tax on our couple’s hypothetical income of $60,000 was $2911 after all known exemptions were taken. That made it the highest of any state we did calculations on. At $100,000 the state income tax would be $5732. The state does not exempt social security income from taxation. The MN sales tax is 6.875%.

2. Montana
At $60,000 our couple would pay $2654, and at $100,000 their payment would be $5415. MT taxes social security income. However, Montana has no sales tax, which is a consideration in Montana’s favor (assume that you spend $10,000 on taxable purchases. At a 5% rate, that amounts to $500/year in sales tax).

3. Missouri
The taxes in the Show Me would be approximately $2415 on a $60,000 income and $4659 at $100,000. MO taxes social security income. Missouri has a fairly low 4.225% sales tax.

4. Utah
After exemptions, the tax would be $2155 on $60,000 income and $4155 on $100,000. Social security income is taxable in UT. Utah’s sales tax is 4.7%.

5. Nebraska
Our couple would pay $1903 on a $60,000 income and $4534 on $100,000. Nebraska does not exempt social security or most pension income. The sales tax is 5.5%.

6. West Virginia
The state income tax on $60,000 would be $1577 and $4077 on $100,000. WV’s sales tax is 6%, and does not exempt social security.

7. Rhode Island
Although RI is generally regarded as a high tax state, its generous exemptions mitigate that somewhat for retirees. Taxes would be $1425 and $3155 on incomes of $60,000 and $100,000. There is a 7% sales tax. Ominous for the future, capital gains begin being treated as ordinary income in 2010. Social security and pension income is generally not exempt.

8. Vermont
The tax on our hypothetical income mix of $60,000 would be $1340 and $3338 on $100,000. Social security and pension income is generally not exempt. There is a 6% sales tax.

9. Kansas
If Adjusted Gross Income is less than $75k social security income Is exempt in this state. Income taxes on $60,000 would be $974 and $4718 on $100,000. The Kansas sales tax rate is 6.3%.

10. Colorado
After all known exemptions are taken our couple would pay $1326 and $3176 on incomes of $60,000 and $100,000. On the plus side for Colorado’s property taxes, 50% of up to $200,000 in property valuation is exempt for qualified seniors. The state has a low 2.9% sales tax, although municipalities often make the effective rate much higher.

An illustration of the importance of social security and pension exemptions
New Jersey is regarded as the highest tax state in the nation. But when it comes to income tax paid by retirees, NJ is a pushover, thanks to its policy of not taxing social security income and providing generous pension exemptions for incomes under $100,000. Our hypothetical couple would only pay $280 and $753 on incomes of $60,000 and $99,999. Property taxes are another matter however.

More Considerations
Please take the rankings on this list as an approximation. To develop these figures we used readily available information on the web – we are not tax professionals and our calculations could be flawed. Information on the web about state tax rates and exemptions is complicated and sometimes contradictory. In addition to those concerns, please recognize that if you or our couple had a different mix of income sources (the same amounts, but more from pensions, for example), the results and rankings would be very different. The best way for you to find out your worst retirement states for taxes is to visit the websites of those states, call them or consult a tax professional, and then determine how they would tax your income sources.

Please note the states are a maze of exemptions and qualifications. For example your military or government pension might be taxable in one state, but not in another. In and out of state pension income is often treated very differently. Distributions from 401k or other retirement plans might be taxable in one state and not in another. There might be an exemption for federal tax paid, or not. A state like Connecticut has very high standard exemptions, while one like Kansas exempts very little. Before you make any significant move based on taxes, make sure you research the subject thoroughly and discuss it with your tax professional.

Property Taxes
If you own your own home there is a very good chance that the largest tax you pay will be for property taxes. The states with the highest property taxes are New Jersey, Connecticut, New York, Massachusetts, Rhode Island, New Hampshire, and Illinois (all of these states have median property taxes over $3000). Of course these states also tend to have some of the highest property values of any state. Here is a link to the Tax Foundation’s state rankings of property tax paid.

For further reference
2011 Worst States for Retirement
Best States for Retirement 2011
Best States to Die in: Inheritance and Estate Taxes
The Tax Foundation -Tax Burdens by State is an excellent source of information about the relative tax burden for different states. However you should remember that their rankings might not apply to retirees, who have different sources of income along with different exemption possibilities.
RetirementLiving.com was our source for much of the information about exemptions and what is and is not taxed. It’s a great resource.
The Most Tax Friendly States

Comments
What do you think about this list, and how it might apply in your situation? Would you consider moving to another state to save money on your taxes? Do you come up with different taxes owed for our examples? Please let us know using the Comments section below.

Posted by John Brady on September 6th, 2011

23 Comments »

  1. In Minnesota, Montana, Utah, Nebraska, Vermont and Colorado, the winters will require several hundreds of dollars per month in heating bills. Unless you are the rare retiree who can still engage in winter sports, head south. Florida and Texas have no income tax; Alabama excludes both Social Security and all government pensions. Go to the retirementliving.com link above for details about all types of taxes, state-by-state.

    by oldnassau — September 7, 2011

  2. I have heard that Georgia is eliminating all taxes on retirement income starting in 2012. Can anyone confirm that to be true? I’m assuming that includes pensions(government/private).

    by Pete Yourell — September 8, 2011

  3. Interesting article on taxes by state! Question: when you refer to exemptions for pensions, does that include IRAs and 401(k)’s ? Are these considered “pensions”?

    by Mary Ann — September 8, 2011

  4. Great questions.
    First, Georgia has enacted and the governor signed a law that will eventually exempt all retirement income from taxation, provided the retiree is 65 (lesser amounts exempt for those aged 62). For taxable years beginning on or after January 1, 2012, and prior to January 1, 2013, retirement income from any source not to exceed an exclusion amount of $65,000.00 for each taxpayer. That exclusion amount goes up until it becomes unlimited in 2016. Thanks for bringing this to our attention.
    http://www1.legis.ga.gov/legis/2009_10/fulltext/hb1055.htm

    Mary Ann:Interesting article on taxes by state! Question: when you refer to exemptions for pensions, does that include IRAs and 401(k)’s ? Are these considered “pensions”?

    Another really important question. The answer is that it varies. Generally a pension means a payment you are getting from your former employer. Most states make a distinction between pension income and IRA/401k distributions, while a few lump them together for either taxation or exemption. You really have to look at your state to evaluate. In general, IRA/401K distributions are more likely to be taxable than are pensions.

    by John — September 8, 2011

  5. Texas has a very high property tax! I am very surprised that Texas is not on your list for high property tax states.

    by Roy Brooks — September 8, 2011

  6. Another good point Roy. According to the Tax Foundation, Texas is the 14th highest state for property tax paid. However when the tax is taken as a percentage of home value, it is 3rd (1.81% of home value). Since Texas doesn’t have an income tax, I suppose the tax revenue has to come from somewhere.

    by John — September 8, 2011

  7. Texas ! my property tax is 2.5% of assess evaluation!! which is higher then the real estate appraisal. you have fight to bring it down. Exception is Modular Homes which decrease in value every year.

    by michele styers — September 9, 2011

  8. As residents of the #1 high tax state above, we had planned to move to FL before liquidating major investments for retirement. However, the companies in which we had invested beat us to the punch and were bought out in the past year, generating a LOT of unwelcome taxable income over which we had no control before we could change residency.I guess I shouldn’t whine about having to pay taxes on the money. At least we have something left to offset the losses of the last few weeks in the remaining investments.

    by speedlady — September 9, 2011

  9. Really enjoyed “best states” review. Was just wondering how Georgia would have been rated if next year’s retiree state
    tax breaks would have already been in effect. How did Georgia rate this year? Thanks, JB/Tallahssee,FL

    Editor’s note: Thanks to the generous exclusion on retirement income for those over 62 that is already in place, our hypothetical taxpayers would probably pay 0 or very little tax on their $60,000 or $100,000 income in 2011.

    by jb — September 10, 2011

  10. HELP with North Carolina!

    by Marilyn — September 13, 2011

  11. […] or $130,000. – Lower taxes for retirees. We did not consider any of the states on our “Worst Tax States for Retirees” list. – High culture. To avoid you getting stuck in just any old town, we selected only […]

    by » 10 Very Affordable… and Great Places to Retire Topretirements — September 13, 2011

  12. I have to say that I completely disagree with your 10 most expensive retirement states. You totally ignored property taxes on homes. The states with the highest home values & property taxes are CA, NY, CONN, and several more. The property taxes on the homes on these states more than outweigh the taxes on retirement incomes for most people. The only way that CA, NY, CONN, & the other high property states are less costly is if someone bought their home many years ago when prices were less. Those states are definitley more costly for anyone thinking of relocating. Believe me, I know this for a fact, I am a CPA, and I used to live in CA and now I live in CO, and CO is far less costly than CA.
    I suggest you rename that article “Most expensive places if all you take into consideration are income taxes.”
    Editor’s Note: We agree that for many retired people, property taxes will be the biggest tax they pay. Of course if you rent, that won’t be the case. It is also a factor of how much your house is worth. If you have a very valuable house you will probably pay a lot of property tax, no matter what state you live in, but certainly more in the northeast and midwest. We did try to point that our primary consideration in this article was income tax. There was a para at end that talks about property tax, so i don’t think we ignored that factor.

    by Kath — September 14, 2011

  13. the property taxes on the homes on these states more than outweigh the taxes on retirement incomes for most people.

    by louisiana maritime lawyers — September 22, 2011

  14. […] For Further Reference Part I (towns A – M)great towns, “10 Very Affordable, and Desirable, Places to Retire” Retirement Ranger selection tool. “Surprising Results: The Worst States for Retirement Taxes” […]

    by » 8 More Affordable Places to Retire You Will Like Living In Topretirements — October 10, 2011

  15. […] further reference: 10 Worst States for Retirement – 2011 Not What You Thought: The Worst Retirement States for Taxes Most Tax Friendly States Five Reasons Why You Should Retire to Another […]

    by » When It Comes to Choosing Your Best Place to Retire – The Most Important Financial and Tax Issue Might Not Be What You Think Topretirements — December 6, 2011

  16. Family is the most important thing to consider where to live. A few extra hundred dollars in taxes is much better to pay than traveling several times a year to visit family. Grand Children need their Grand Parents around for the most part. So many people only think of themselves and not what their Grand Children’s needs are. California here we come!

    by Pony Express — December 19, 2011

  17. I totally agree. Kids and grandchildren are the most important consideration on where to retire.

    by bubbajog — December 20, 2011

  18. Well said, Pony Express. When I read this to my husband he thought I wrote it. Living on the East Coast, we are missing too many significant events in the lives of our grandchildren. We also echo, “California, here we come.”

    by Kats — December 26, 2011

  19. This article doesn’t mention that railroad retirement annuities are exempt from all state income taxes. A lot of people don’t know that.

    by James — September 1, 2012

  20. Michele from Texas made a mistake when saying that “Modular ” homes go down in value. Many people confuse “Manufactured Home” wich is a trailer and does go down in value over time , With a “Modular Home” that in most cases is better then a site built home , but at the very least equal to the stick built home as far as value. Of course in the current market in most areas values have dropped on everything

    by Steve — September 2, 2012

  21. I agree that being around family – especially grandkids is the most important factor for me to find a place in retirement. I live in Maryland presently in a small town which is not bad for retirement except the taxes – property and state – are out of sight. I am currently looking in southern Delaware – near the ocean – and am thinking about a small trailer – single or double wide – that I can afford as a second home. This area is only about 75 miles away from where I am now and two of my kids live within an hour. If I like the area, then I plan on selling the house I have and moving in about 7-10 years.

    by Carol — September 3, 2012

  22. But Minnesota has NO tax on food or clothing, and one of the best safety nets in the country for seniors!

    by kimbee jeanq — September 3, 2012

  23. Living near the coast of Texas is getting very expensive! We do not live on the water but still have to pay flood insurance, windstorm insurance and then regular house insurance. Is there a comparison chart for insurance by state?

    by Karen Brosseau — July 23, 2014

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