This article takes a look at the 15 best states to retire for taxes in the US. You can skip our detailed analysis and go to The Best State to Retire for Taxes in the US.
Declining Retirement Confidence in 2024: Inflation and Tax Challenges
Worker and retiree confidence levels considerably dropped in 2023, and this confidence level hasn’t recovered so far this year, notes a 2024 Retirement Confidence survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research. Findings by T. Rowe Price Group, Inc. (NASDAQ:TROW) conclude the same, stating retirement confidence is seen to decline as retirement time approaches. Nevertheless, a majority of respondents remain confident about their retirement prospects. The EBRI report reveals that 68% of workers and 74% of retirees are confident that they will be able to live comfortably throughout their retirement. For all those who don’t feel the same, inflation is, in large part, to blame.
Inflation, together with a lack of retirement savings, has been forcing many retirees back to work. A process termed as “Unretiring” by T. Rowe Price Group, Inc. (NASDAQ:TROW), it seems that working part-time isn’t a bad strategy for retirees. A Retirement Saving & Spending Survey by T. Rowe Price Group, Inc. (NASDAQ:TROW) agrees, stating that while 48% of respondents did go back to work for financial reasons, 45% did for social and emotional benefits. Whether or not you, as a retiree, need work for financial reasons, it’s best to get your taxes done right. Understanding and planning for taxes in retirement is important as they impact both your savings and your future income. From navigating the taxation of Social Security benefits and Required Minimum Distributions (RMDs) to maximizing the advantages of tax-advantaged accounts like Roth IRAs, effective tax planning can help you maintain financial stability and peace of mind in your retirement years.
If you are a retiree thinking of going back to work, you may want to check out the best states to retire in the US financially.
Speaking of taxes: those who think their Social Security income isn’t going to be taxed, think again. While it’s true that there are states in the US that won’t tax your Social Security Income, you cannot evade taxes at the federal level if you file your federal tax return as an individual with a combined income over $25,000. Up to 85% of your Social Security benefits can be taxed, and you may even be pushed into the 40% marginal federal tax rate if you don’t understand Social Security tax brackets and your income tax brackets. Delaying your claim on Social Security seems to help, as you may be in a lower tax bracket later in life than you are now. It is also a surefire way to boost your benefits too.
For those with more than just Social Security as their retirement income, it is important to know that taxes don’t just go “poof” in retirement. It may be shocking to know that all of the money you’ve saved up for retirement will now be taxed as regular income and may push you into the same tax brackets as the income you earned when you worked. More importantly, as per The Charles Schwab Corporation (NYSE:SCHW), your overall tax liability is heavily dependent on where you live. This is why an important way to be smart about taxes is to look at them at the state level. This brings us to the question: What is the most tax-friendly state for retirement? Many people ask us this question to make the most of their retirement income. Yet again, taxes aren’t the only thing one must consider when deciding on where to retire. Cost of living is just as important, and so is proximity to family and friends. This is what Hayden from The Charles Schwab Corporation (NYSE:SCHW) has to say:
“When thinking about relocating, taxes are only one of many factors to weigh, including climate, lifestyle, proximity to family, and the availability and quality of health care”
As such, some of the best states to retire for taxes and cost of living are Mississippi, Oklahoma, Missouri, and Alabama. Some of the least tax-friendly states to retire to that you should avoid are Hawaii, Massachusetts, and California. These states are also notorious for their high cost of living, so it’s best to avoid them if you’re on a fixed income.
With that said, we’ve crafted a list of all the best states to retire for taxes in the US. While our list may be a good start to check out states where you can retire, staying in touch with your tax advisor is also important.
“That said, these rules change frequently as states compete for business and investment…so be sure to check with a tax advisor who is familiar with the relevant state and local tax laws.”
-Hayden Adams, CPA, CFP®, director of tax and financial planning at the The Charles Schwab Corporation (NYSE:SCHW) Center for Financial Research.
Ingus Kruklitis/Shutterstock.com
Our Methodology
To compile the list of best states to retire for taxes in the US, we relied on our rankings from the Top 26 Tax-Friendly States in the US. Next, we selected only the Very Tax-Friendly and Tax-Friendly states, which were already scored for taxes on Social Security, taxes on other retirement income, sales, and property taxes. Next, we ranked the states for income taxes, considering many retirees are now going back to work. States were scored on all factors and an Insider Monkey total score was generated to rank the states.
Here are the best states to retire for taxes in the US:
15. Tennessee
Insider Monkey Score: 34
Combined State Sales Tax Rate: 9.548%
Average Effective Property Tax Rate: 0.58%
Tax Friendliness: Tax Friendly
Income Tax Rate: 0
One of the best states to retire for taxes in the US is Tennessee. If you wish to work after retirement, this is the state to be in. This is because the state doesn’t have an income tax, and it’s overall tax-friendly to retire to as well. There are no estate and inheritance taxes either, another plus of retiring to the state. Sales taxes, however, are pretty high.
14. Louisiana
Insider Monkey Score: 34
Combined State Sales Tax Rate: 9.563%
Average Effective Property Tax Rate: 0.55%
Tax Friendliness: Tax Friendly
Income Tax Rate: 1.85-4.25%
Our IM rankings show that another tax-friendly state for retirees is Louisiana. Like Tennessee, combined sales taxes can be quite high here. However, social security and income from public pensions aren’t taxed in the state. Property tax rates are some of the lowest in the country.
13. Kentucky
Insider Monkey Score: 35
Combined State Sales Tax Rate: 6.000%
Average Effective Property Tax Rate: 0.80%
Tax Friendliness: Tax Friendly
Income Tax Rate: 4%
Ranking 13th on our list of best states to retire for taxes in the US is Kentucky. Social Security isn’t taxed in the state, and there are deductions available on other types of retirement income. Sales and property taxes are also on the lower side, but the state does have an inheritance tax.
12. Idaho
Insider Monkey Score: 36
Combined State Sales Tax Rate: 6.026%
Average Effective Property Tax Rate: 0.56%
Tax Friendliness: Tax Friendly
Income Tax Rate: 5.80%
Based on our IM study, Idaho is a tax-friendly state to retire to. The state has a combined state sales tax rate of 6.026% and an average effective property tax rate of just 0.56%, offering a tax-friendly environment for retirees so that can they stretch their retirement incomes a bit. There is a flat individual income tax rate of 5.8%.
11. New Hampshire
Insider Monkey Score: 40
Combined State Sales Tax Rate: 0.000%
Average Effective Property Tax Rate: 1.89%
Tax Friendliness: Tax Friendly
Income Tax Rate: 0
New Hampshire is one of the states that don’t have an income tax. This makes it very tax-friendly for retirees. The property taxes in the state may be on the higher end, but the good news is that the state doesn’t have a sales tax either. However, there is a tax on dividends and interests that is being phased out.
10. Virginia
Insider Monkey Score: 41
Combined State Sales Tax Rate: 5.771%
Average Effective Property Tax Rate: 0.76%
Tax Friendliness: Tax Friendly
Income Tax Rate: 2-5.75%
Another tax-friendly state to retire to in the US is Virginia. The combined state sales tax rate is 5.771%, the average effective property tax rate is 0.76%, and overall the state is deemed tax-friendly for retirees. Social Security isn’t taxed in the state, and there are deductions on other types of retirement income.
9. South Carolina
Insider Monkey Score: 42
Combined State Sales Tax Rate: 7.499%
Average Effective Property Tax Rate: 0.53%
Tax Friendliness: Tax Friendly
Income Tax Rate: 0-6.5%
With an Insider Monkey score of 42, South Carolina ranks 9th on our list of best places to retire for taxes in the US. The state has a combined state sales tax rate of 7.499%, which, while moderate, is offset by other significant tax advantages. The average effective property tax rate is just 0.53%, which is low, and reduces the financial burden of home-ownership.
8. Mississippi
Insider Monkey Score: 43
Combined State Sales Tax Rate: 7.062%
Average Effective Property Tax Rate: 0.76%
Tax Friendliness: Very Tax Friendly
Income Tax Rate: 5%
Mississippi is one of the best states to retire on a fixed income. The cost of living in the state is 13.7% lower than the national average. Social Security isn’t taxed in the state, and neither is income from other sources such as 401(k)s and IRAs.
7. Georgia
Insider Monkey Score: 46
Combined State Sales Tax Rate: 7.384%
Average Effective Property Tax Rate: 0.83%
Tax Friendliness: Very Tax Friendly
Income Tax Rate: 1-5.75%
Another highly-favorable state for taxes is Georgia. The state doesn’t tax Social Security, pensions, and retirement accounts are partially taxed. Seniors over 62 can avail a deduction of up to $65,000.
6. Delaware
Insider Monkey Score: 48
Combined State Sales Tax Rate: 0.000%
Average Effective Property Tax Rate: 0.55%
Tax Friendliness: Tax Friendly
Income Tax Rate: 2.2-6.6%
This state with no sales tax is considered to be tax-friendly for retirees. Delaware also boasts some of the lowest property taxes in the country.
5. South Dakota
Insider Monkey Score: 54
Combined State Sales Tax Rate: 6.111%
Average Effective Property Tax Rate: 1.14%
Tax Friendliness: Very Tax Friendly
Income Tax Rate: 0
Deemed the best state to retire for taxes in 2024, South Dakota is very tax-friendly towards retirees. Since there is no income tax here, all sorts of retirement income in the state go tax-free. There are no estate taxes or inheritance taxes here either. Property taxes are on the higher end, but still lower than many others.