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There Are Now 8 States No Income Tax

Category: Financial and taxes in retirement

November 18, 2020 — Although there are many good reasons to choose a state for retirement, for many well-heeled retirees, finding one without an income tax is right up there. Up until 2021, only 7 states could claim that particular attraction. But coming in 2021 an 8th will join the list, Tennessee (the State previously taxed dividends and interest, but not other income). Other states have made moves to make their tax situation more favorable in 2021 as well, mainly by increasing standard deductions and personal exemptions.

Starting in 2021 the eight states that charge no income tax will be: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire almost makes the list because it only taxes interest and dividends (up until 2021 Tennessee was in the same category).

For states that do have income taxes, finding the best deal is not that simple

The ways states set up their income tax structure is complex and confusing. So if you are considering several states for retirement and you have substantial income that could be taxed, do your homework – it’s not that simple comparing the various apples and oranges.

Some states are obvious very high tax. California, Hawaii, New Jersey, and New York qualify here – if you a high earner you could pay as much as 13.3% in CA on income over $1,000,000, 10.75% in NJ over $5,000,000, or 11% in Hawaii on $200,000 of income. NY’s max rate is 8.82% on income of just over $1,000,000.

Standard deductions and Personal Exemptions are another issue to consider. Some states have very generous standard deductions and/or personal exemptions that mean most retirees will not have to pay much, if any income tax. Arizona and Minnesota are two states that recently adopted the new federal standard deductions ($12,400/single, $24,800/couple). These deductions are much higher than these states offered in the past, meaning fewer retirees will have to pay state tax. Colorado, Idaho, Maine, Missouri, New Mexico, North Dakota, South Carolina, and D.C also have the higher federal deduction. Connecticut, Maryland, Rhode Island, and Vermont have generous Personal Exemptions that make those states similarly attractive to retirees with moderate income.

Flat rates vs. multiple brackets further complicate

Nine states including Illinois have a flat income tax rate – there is only one bracket. So in in IL you will play 4.95% on every dollar you earn after deductions and exemptions. That works out well if you are a high earner, but not so great on a percentage basis for lower earners. Indiana (3.23%), Kentucky (5%), Massachusetts (5%), Michigan (4.25%), North Carolina (5.25%), Pennsylvania (3.07%), Utah (4.95%) are other states with flat rates.

Other states have unusual brackets, such as Georgia’s regressive tax, where you hit the maximum bracket with income of $7,000. Compare that to New Jersey’s very progressive top bracket rate of $5,000,000.

Bottom line

We always urge people to retire where they want to, and not let the tax tail wag the dog. But if taxes are very important to you, comparing state income taxes is pretty simple if the state you are considering doesn’t have an income tax. In other states, it is not that simple, for the reasons stated above and many others like taxation of Social Security, pensions, etc. If taxes are an important driver in your retirement decision, the best policy is to have your accountant prepare a sample return for any state you are considering. Note: We used the Taxfoundation.org’s excellent article comparing various states tax schemes as the foundation of this article.

For further reading

Posted by Admin on November 18th, 2020

17 Comments »

  1. This is just a starting point as the article mentions, and doesn’t replace the need to do research yourself. For ex., the article mentions PA’s flat rate but doesn’t note that PA doesn’t tax pensions, 401k withdrawals or social security benefits. For many retirees, that is the equivalent of no income tax. Whether or not a State taxes Social Security may also tilt the scale.

    by Kate — November 18, 2020

  2. A state’s income tax is just one factor. Although NY is always rated as high tax, we pay no income tax due to income being from SS, pensions, and 401s. We are able to take only the minimum required withdrawals (none for 2020) so we stay below the threshold.

    Also, most states that have no income tax make up for that in higher sales and/or real estate tax. It is good to examine what would apply to your situation, along with other factors such as cost-of-living, life style, etc.

    by Linda NY — November 18, 2020

  3. These are great comments Kate and Linda NY. Thanks for adding those important factors that need to be considered.

    by Admin — November 18, 2020

  4. I’d rather see no tax on Soc. Sec., Retirement pensions & some type of lower property tax once you turn a certain age than having no State income tax. For myself I’m not working anymore thus not earning high income to be taxed. My state taxes everything, retired people get no break, & our cost of living is also high. Move? Yes that is an option but I happen to love New England/Vermont, most of my family is here & I enjoy the country space my house affords me. Yes our winters seem to last forever, but once retired most times you can pick the day(s) you go out. Worse case, put on your snowshoes & head out!!

    by VTRetiree — November 19, 2020

  5. Unless you have a huge retirement income, look at the overall cost of living rather than just the taxes. And like politics, all COL is local. In Florida, for example, the COL in one city might be 1% below the national average and, in another, 17% above. (Source: SmartAsset.com). I write about taxes and cost of living options in my new book, “Glorious Back Nine: How to Find Your Dream Golf Home,” which also applies to non-golfers who appreciate manicured landscaping and a range of amenities and social activities.

    by Larry — November 19, 2020

  6. Like Linda said, just because there is no income tax, doesn’t mean there are NO taxes! PA might not tax pensions and 401Ks BUT they DO have a generous inheritance tax – especially if the beneficiaries don’t live in PA as well! Even on a Trust – they make sure they get their cut. (It also seems to take them, at least, 4-6 months to release the estate too!) Tennessee has no income tax but the sales tax is 9-3/4% on just about everything! Watch where you live – property taxes can be a lot higher inside the city limites than someone living just outside. New Hampshire has no income tax but their real estate taxes can be a lot higher than other places.

    Nevada has no income tax which is off set by the casinos. However, I suspect that may change with the pandemic shutdowns, so be cautious before you make the leap. They also have a generous sales tax.

    We moved from TN to Maine – yes, we have some income tax here now but not on Soc. Sec. and yes, property taxes are higher BUT sometimes you get what you pay for. We have excellent services, a large and active (pre-Covid) senior & kid’s programs, a working library for free (we had to pay to join in TN) and a cooler climate. Medical is superior too. In other ways, costs are less than TN. Taxes are everywhere!

    The BEST place is where you WANT to live and for those looking ahead – save towards or budget for that. I suppose when you have a choice of choosing which state line or city limit to cross – this info can make a difference. The cost of living here is worth every extra penny.

    by Flatearth6 — November 19, 2020

  7. I live in Washington State with no state taxes. But as above our property taxes and vehicle registrations are very high. We pay over 6000 a yr in property taxes and we are moving to Pahrump Nevada. Much cheaper and our property taxes will be around 1000-1500

    by Tomi — November 20, 2020

  8. Well, my state always makes the “worst states to retire in” list. Yes, it is expensive, but I feel happy here. I have lived in some of the low tax states, but home is where the heart is. This pandemic makes it clear that the politics of the state matters when it comes to quality of life.

    by Maimi — November 20, 2020

  9. Miami-

    I’m with you! Rhode Island has hefty taxes, but it is the most beautiful place I have ever lived and I am grateful for my Governor in these challenging times. I love the coast, the proximity to great air, train and bus connections, the multitude of colleges and universities, great cultural events and fine medical care. Having lived in many places, I call this home and consider it my great good fortune to have landed in this jewel of a place. Cheers! Keep safe and well!

    by Barb — November 21, 2020

  10. I agree with all of these comments. Income tax might be a big consideration for many well to do folks, but for most retirees it is not. There are plenty of states with high exemptions and deductions that reduce state income taxes to almost nothing. The most important tax consideration in my mind is property tax. In a lot of states it is not that difficult to have property taxes of $10,000 or more with very few opportunities to get a reduction for being over 65 etc. You have to pay even though you might not have that much income. Sales tax is rarely that big a factor unless you are buying an expensive new car or boat on a frequent basis. For example, if a year you bought $10,000 worth of taxable items, the difference between a 3% and a 6% sales tax is $300.

    by Rick — November 21, 2020

  11. In response to Flatearth6’s post, i just want to say that I live in Tennesse and the library is free. I wouldn’t want all reading to think that joining and paying for entrance to a library is necessary in all of Tennesses.

    by ella — November 21, 2020

  12. Agree that income taxes are just one factor! When I was researching states, I prepared a spreadsheet for several finalists: everything from income taxes, property taxes on a baseline house price, sales tax, quality of life (good libraries, driveable airport, beaches, church, good medical care, shopping, senior educational opportunities, sports teams, weather, political climate, etc.). I even got into the weeds and considered gas taxes, HOA fees and the cost of insurance. The extra $1K-$5K that it would cost to live in State A vs. State B was often offset by lifestyle choices. After all that work, I ultimately moved near my family instead of to one of the places I originally thought I’d choose for retirement…but only after I researched my kids’ state to verify that it came out ok on the spreadsheet LOL. Having the support and network of nearby family during troubled times is priceless.

    by Kate — November 22, 2020

  13. Kate, Hello!

    Please remind all of us where you finally ended up. Are you still happy there? Have any of the original costs increased beyond what you imagined.?

    Thank you!

    by Jennifer — November 22, 2020

  14. I moved to Arizona from California and I saw a large decrease in costs, my personal state tax here is much cheaper, my real estate taxes are super low compared to California, and my quality of life it much better. Happy in AZ!!!!!

    by Loralee — November 22, 2020

  15. Hi Jennifer. Crazily, I ended up in Ohio (after initially researching SC, FL, NC & PA). I’m in a western suburb of Cleveland along Lake Erie. I traded off warm Southern winters for freezing winters with a warm fireplace and my kindle. I traded the ocean for Lake Erie. I traded a big 55+ community for a cluster home neighborhood of 55+ neighbors. My neighborhood doesn’t have the amenities of a Sun City, but my town has more amenities! I have a reasonable cost of living, great medical care (Cleveland Clinic is #1 in the country for cardiac care and there are hospitals/doctors everywhere). Cleveland has ethnic festivals, convenient shopping, NFL/NBA teams, an international airport, museums, universities, etc. Despite living near the city, my suburb has very low crime and I even have deer in my yard. No regrets so far. Like the people who select New England, I recommend following your heart AND your budget. Taxes tend to balance each other out: for ex., no income taxes can be offset by high property and sales taxes. And as others have noted, sometimes a slightly higher cost of living actually pays for a better lifestyle.

    by Kate — November 22, 2020

  16. Kate–well said! I live in the District of Columbia now and it is expensive, but we do get quite a few benefits and if one has an average income in retirement, there are still lots of free things to do (pre-Covid-19), great medical care, and one can walk to many things such as grocery stores and restaurants. Lots of good public transportation too, and half off for Seniors! One must balance what one gets with the lifestyle they want. It gets ungodly hot here in July and the summer, but we can have milder winters, in some years.

    by Jennifer — November 23, 2020

  17. Kate – thanks for giving Cleveland some love! 2021 will mark 30 years of living in The Land. As much as we love it here, we will be moving on in three years. I just wish I could take all of the amenities of CLE and take it west or southwest.

    by BrianH — November 25, 2020

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