Looking for the Most Tax-Friendly States?

Updated 4/28/2013. Note: State tax rates are changing constantly. While we do are best to keep this page up to date you should check with the individual states before you make any decisions based on taxes.

Are you concerned about finding the most tax-friendly states for your retirement? This website and our free weekly eNewsletter can help you cut through the confusing state tax picture and make sure you choose one that is truly tax-friendly. US News came out with a top 10 most tax-friendly towns list in late 2008. Their list is interesting, if a bit bizarre. And by all means, don't miss our "10 Worst States for Retirement - 2012" article, or the "Surprising Results: The Worst Retirement States forTaxes".

The major taxes you need to be concerned about are property taxes, income taxes, sales taxes, and how your pensions and social security will be taxed in the state. All of these factors need to be considered together for your particular situation. You should also be concerned about differences within a state - sales, income, and property taxes can differ significantly among cities in the same state.

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.

Property Tax. Property tax is the enemy for most retirees. These taxes are based on the worth of your home, but they have no relation to your income or ability to pay. 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. Alabama has the lowest and New Jersey the highest property taxes in the nation. For example in a recent year, the median property tax paid in Alabama was $398, in New Jersey it was $6,579 (of course the value of the homes was certainly higher in New Jersey). See John Brady's NY Times Op-Ed on "Time to Retire the Property Tax"  California has a law limiting property tax raises. Florida's Save Our Homes law limits the amount of the appraised value of their home can go up by the cost of living or 3%, whichever is less, for permanent residents.

Taxation of pensions and retirement distributions from 401ks/IRAs is a very important consideration for retirees looking for a tax-friendly state, particularly if you are going to receive a sizable pension. Many states exempt some or all federal, state, and local government pensions from state income taxation - those include Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan (where the exemption is being phased out), Mississippi, New York, and Pennsylvania (plus, see above for the 7 states that have no state income tax at all). Georgia 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 from state income taxation.  Five states allow no exemption for pensions of any kind: California, Connecticut, Nebraska, Rhode Island, and Vermont. This link has some more info on state taxation of pensions, although the Michigan data is dated. 

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

Sales Tax. This tax is probably not that major a factor for the average retiree, at least compared to the amount you might pay for income and property taxes. Obviously if you make a big ticket purchase like a car, it will be a factor. 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.

As you can see there are some states that 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 the presence of an income tax is of no bearing to you.

In general the states with the lowest state tax burden are:

  • Alabama
  • Delaware
  • Tennessee
  • Wyoming
  • Alaska

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, 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. Use this link to find the "20 Most affordable Places to Retire"

Estate and Inheritance Taxes
There are 21 states that have estate or inheritance 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 Maryland and New Jersey, have both. Several states like Indiana and Tennessee are either phasing out these taxes, or are increasing the exemptions. Connecticut is going in the opposite direction. See the Topretirements article, "Best States to Die In" for more details. Forbes also a helpful article and chart, "States with Death Taxes."

Find out more about taxation in the individual Topretirements state retirement guides

Get started by clicking on the state guides on the right. Or check out our reviews of the best retirement towns

 
 

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