This article takes a look at the 14 states that don’t tax your retirement income. If you wish to skip our detailed analysis on choosing your next retirement destination, you may go to 5 States That Don’t Tax Your Retirement Income.
Choosing Your Retirement Destination: Navigating Tax Implications and Beyond
As you bid farewell to your career, the next consequential question emerges: where shall you choose to spend your golden years? Choosing where to retire largely influences how far your nest egg can go, which is why this decision must be taken wisely.
“Whether you’re a retiree, a remote worker, or just looking for a change of scenery, the idea of pulling up stakes for purportedly greener pastures isn’t that unusual these days. However, the tax implications can be profound, so it’s smart to take a hard look before you break out the packing tape.”
-Hayden Adams, CPA, CFP®, director of tax and financial planning at the The Charles Schwab Corporation (NYSE:SCHW) Center for Financial Research.
Exploring the findings from the 2023 annual survey by U-Haul Holding Company (NYSE:UHAL) and United Van Lines, we discover that New Jersey is among the top states witnessing the most outbound moves. A considerable portion of these individuals consists of older, higher-income retirees who are, in turn, choosing to relocate South. They are favoring states with lower taxes and a more affordable cost of living, a strategic move aimed at ensuring the longevity of their retirement savings.
Another state that has reflected the largest net loss of one-way movers, as revealed in U-Haul Holding Company (NYSE:UHAL)’s study, is California. Yet other states that have witnessed rock-bottom growth moves include Illinois and Massachusetts. While California, New Jersey, and Massachusetts are some of the worst states for their cost of living and it’s understandable why people are looking to move, the same cannot be said about Illinois.
So why is it that Illinois is witnessing this substantial outmigration of residents to other states? The answer may be in its taxes. According to a study by the Paul Simon Public Policy Institute, 47% of Illinoisans said they wanted to leave the state back in 2016. It also found that the single biggest reason that they quoted for wanting to leave was these very “taxes”. As of 2023, the Illinois Policy Institute’s Lincoln Poll has revealed that 51% of voters said they would leave if they could. Same as previous, these voters have taxes to blame. The statistics concerning Illinois, along with the trend of outbound moves from states like California and New Jersey, unequivocally convey that individuals are inclined to avoid locations that impose higher costs on them.
Further analysis of the U-Haul Holding Company (NYSE:UHAL) study finds that the most popular destinations of one-way U-Haul® truck customers were Florida, Texas, and the Carolinas. As outlined by The Charles Schwab Corporation (NYSE:SCHW), high-income workers may gravitate towards states that don’t tax retirement income. However, focusing only on the income tax isn’t the right way to go. According to Hayden, director of tax and financial planning at the Schwab Center for Financial Research, taxes shouldn’t be your first consideration. It should be considered along with other factors that are important to you as a retiree, such as climate, quality of healthcare, and even proximity to family. In other words, the right way to go when choosing your potential retirement destination is to map out a list of all the places where you can live in your retirement years.
“So, if you wish to live by the beach or close to one of your kids, for example, figure out all the places you could live—then take a look at which taxes matter most based on your situation and stage of life.”
Take the example of Florida which is considered one of the most tax-friendly states for retirees.
“Florida’s lack of an income tax may seem like a bargain, but property tax there is high, and the government raises the bulk of its revenue through state and local sales taxes”.
–Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research.
Bottom-line? Retiring to states that don’t tax your pension or social security isn’t enough. The key is to consider your entire tax burden so that you can make the best possible retirement move financially.
With that said, let’s move on to the states that don’t tax your retirement income, and see how friendly these states are overall.
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Methodology
To compile the list of states that don’t tax your retirement income, we began by listing out all states and checked out their tax-friendliness. Nine states were selected that have no state income tax. Next, another six states that don’t tax pension income were selected from AARP. Out of the six states, four states are tax-friendly according to Smart Asset, and two are moderately tax-friendly. To make a list of 15, we excluded one moderately tax-friendly state due to its higher cost of living. Next, the states were ranked based on their overall tax-friendliness and their cost of living. For taxes, states were allotted a score from 1-4, with 1 being least tax-friendly to 4 being very tax-friendly. These have been sources from Smart Asset. The cost of living for the states has been sourced from the Missouri Economic Research & Information Center. Scores were totaled and states were ranked in an ascending order from the lowest to the highest scores.
It is important to note that the taxation of retirement income comes with a myriad of intricacies. First, federal tax is still owned on retirement income even if the state itself does not impose an income tax. Moreover, while many states impose taxes on distributions, virtually all of them provide some level of tax relief for retirees. This relief may take the form of a tax cap, an income limit on exemptions, or other beneficial breaks. Given the dynamic nature of state tax laws, it remains imperative to stay abreast of changes through regular updates from your state tax commission.
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Here are the 14 states that don’t tax your retirement income:
14. Alaska
Insider Monkey Score: 5
Tax Friendliness: Very Tax-Friendly
Cost of Living Index: 125.2
Of the states that don’t tax your retirement income, Alaska happens to be one. Since there is no income tax in the state, all retirement income to seniors goes tax-free. Moreover, there is no sales tax in the state, and no estate or inheritance tax either. The only significant tax in this state is its property tax, which is 1.17%-slightly higher than the national average. What’s more-living in Alaska can be financially advantageous for retirees. This is because the state offers incentives to individuals who choose to live there permanently. The Alaska Permanent Dividend fund, as it is called, goes to every eligible Alaskan resident. However, seniors may think twice before they choose to move to this state because of the harsh weather and the oh-so-high cost of living, making it one of the worst states to retire on social security. The cost of living in this state is a whopping 25.2% higher than the national average.
13. Washington
Insider Monkey Score: 5
Tax Friendliness: Tax-Friendly
Cost of Living Index: 116
In the state of Washington, there is no state income tax on social security or other forms of retirement income. This is because, like Alaska, the state has no income tax. The good news for retirees who live here is that those who wish to work part-time even after retirement can do so tax-free. Property tax rates in the state are slightly lower than the national average, However, the state churns out its revenue from its high sales tax rate. Statewide, the sales tax rate is 6.5%. Some cities and counties impose their own sales tax rate that can be as high as 4%. Collectively, seniors can expect to pay a sales tax as high as 10.5%. However, there are some sales tax exemptions available. Even though the state of Washington has a pretty high cost of living, 16% higher than the national average, many seniors living there may not have the heart or the energy to move. For seniors like these, we have curated a list of some of the best places to retire in Washington on social security.
12. New Hampshire
Insider Monkey Score: 6
Tax Friendliness: Tax-friendly
Cost of Living Index: 114.1
Next on our list of states that don’t tax retirement income is New Hampshire. While the state doesn’t tax social security or other retirement income, dividends and interest are taxed for the current tax year. According to the NH Department of Revenue Administration, this tax rate is 5% for taxable periods ending before December 31, 2023, 4% for taxable periods ending on or after December 31, 2023, and 3% for taxable periods ending on or after December 31, 2024. The I&D tax shall be repealed for taxable periods beginning after December 31, 2024. New Hampshire is also one of the few states that don’t have a sales tax. Besides all the good news, this state bears some of the highest property tax rates in the country. The average effective property tax rate is 2.09%, which is higher than the national average. Moreover, cost of living in this state is 14.1% higher than the national average.
11. Nevada
Insider Monkey Score: 8
Tax Friendliness: Very Tax- Friendly
Cost of Living Index: 101
The state of Nevada has no state income tax. As a result, all sorts of retirement income in the state goes to seniors tax-free. The state of Nevada can be a great place to retire considering it is a sunny state and the cost of living is close to the national average. Property taxes in the state are low, whereas sales tax is higher than the national average. Retirees can stretch their dollars further here in Nevada, and it’s even possible to retire on social security. This tax-friendly state has one of the lowest average retirement age in the US at 63 years.
10. Florida
Insider Monkey Score: 9
Tax Friendliness: Very Tax-friendly
Cost of Living Index: 100.7
Another state with no income tax on our list is Florida. The sunny state of Florida has many great places to retire, and the biggest draw for seniors is that it’s one of the states that don’t tax your retirement income. Moreover, sales taxes and property taxes do exist. However, both of them are close to national marks. The statewide sales tax rate, except for a few exemptions, is 6%. Combining local sales tax rates, the total can be as high as 8.25%. Warm and sunny weather, tax-friendly environment, and a close-to-national-average cost of living makes Florida one of the most popular states to retire to in the US.
9. Pennsylvania
Insider Monkey Score: 9
Tax Friendliness: Tax-friendly
Cost of Living Index: 95.6
Pennsylvania falls amongst the states that don’t tax social security. It is a tax-friendly state that fully exempts all social security, as well as payments from retirement accounts, from taxes. For seniors aged 60 and over, there is even an exemption from taxes on pension income. The cherry on top of Pennsylvania’s tax-friendliness is its low cost of living. The cost of living in this state is 4.4% lower than the national average, so retirees have a chance to stretch their retirement incomes further in this state.
8. Texas
Insider Monkey Score: 10
Tax Friendliness: Tax-friendly
Cost of Living Index: 92.7
The state of Texas does not have an income tax and is quite a tax-friendly state to retire to. This Lone Star state can be a great place to retire, considering all retirement income goes to seniors tax-free and the cost of living is also lower than the national average. On the downside, property and sales taxes are some of the highest in the US. The average effective tax rate in the state is 1.9%, which is one of the highest in the country. Meanwhile, the sales tax rate is about 6.25%, with local sales tax can be as high as 2%. Retirees can live in some of the best cities in Texas on less than $2,500 a month.
7. South Dakota
Insider Monkey Score: 12
Tax Friendliness: Very Tax-friendly
Cost of Living Index: 92.4
Next on our list of states that don’t tax your retirement income is South Dakota. There is no income tax in the state, which is why all types of retirement income go tax-free. What makes this state a very tax-friendly one is that even the sales tax is low. Meanwhile, property tax rates are a bit high but they can be offset by seniors. This is because the cost of living in this state is 7.6% lower than the national average. South Dakota even offers a Homestead Exemption Program that seniors can avail . This program allows an individual to delay their payment of property taxes until the house has been sold. The property taxes accumulate, with an annual interest rate of 4%, but the obligation to settle these taxes arises only upon the transfer of the property. To avail this exemption, the seniors must be at least 70 years old or the surviving spouse of someone previously eligible. Next, they must have been a resident of this state for at least 5 years or owned a house for at least 3 years.
6. Wyoming
Insider Monkey Score: 12
Tax Friendliness: Very Tax-friendly
Cost of Living Index: 92.4
Wyoming, like quite a few other states in the US, does not have an income tax. This means social security retirement benefits and all other sorts of retirement incomes are not taxed in the state. Moreover, sales and property taxes are also some of the lowest in the country, which makes it a very tax-friendly state for seniors. The average effective property rate is 0.6%, which is one of the lowest in the US. Also, sales taxes are low as well. The sales tax rate is 4%, and the combined rate of sales and local sales taxes is 5.36%. Cherry on top, the cost of living in this state is 7.6% lower than the national average. Wyoming’s picturesque landscapes, outdoor recreational opportunities, and relatively low cost of living make it an appealing choice for those seeking a peaceful and financially advantageous retirement.
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Disclosure: none. 14 States That Don’t Tax Your Retirement Income is originally published on Insider Monkey.