The 14 US states that don’t tax your retirement income are examined in this article.
Selecting Your Retirement Location
Handling Tax Consequences and More When you say goodbye to your profession, the next important consideration is where you will spend your elderly years. Making the right retirement location choice is crucial since it affects how far your nest fund may go.
Examining the results of U-Haul Holding Company (NYSE:UHAL) and United Van Lines’ 2023 annual survey, we find that New Jersey is one of the top states seeing the greatest number of outbound moves.
Many of these people are older, wealthier retirees who are making the decision to move south of the border. As a calculated tactic to ensure the sustainability of their retirement assets, they are giving preference to states with lower tax rates and more inexpensive cost of living.
California is another state that has seen the highest net loss of one-way movers, according to a survey conducted by U-Haul Holding Company (NYSE:UHAL). However, Massachusetts and Illinois are two more states that have seen extremely slow growth. While it makes sense that people are eager to relocate given that California, New Jersey, and Massachusetts have some of the highest costs of living, the same cannot be said about Illinois.
What then is causing Illinois’s population to be leaving the state in such large numbers and moving elsewhere? Taxes may hold the solution. In 2016, a research by the Paul Simon Public Policy Institute found that 47% of Illinoisans desired to leave the state.
It was also discovered that these very “taxes” were the main justification people gave for wanting to leave. According to the Illinois Policy Institute’s Lincoln Poll from 2023, 51% of respondents stated they would leave if given the option. As before, the citizens’ taxes are to blame. The data pertaining to Illinois, in conjunction with the pattern of out-of-state moves from states such as California and New Jersey, clearly indicates that people have a tendency to stay away from places that have greater expenses.
According to a closer examination of the U-Haul Holding Company (NYSE:UHAL) survey, Florida, Texas, and the Carolinas were the most frequently visited locations for customers renting one-way U-Haul® trucks. According to The Charles Schwab Corporation (NYSE:SCHW), wealthy employees might favor states that do not impose income taxes on retirement benefits.
But concentrating just on the income tax isn’t the best course of action. Taxes shouldn’t be your top priority, according to Hayden, head of tax and financial planning at the Schwab Center for Financial Research. It should be taken into account in addition to other aspects that are significant to you as a retiree, such as the locality of your family, the standard of healthcare, and the temperature. To put it another way, making a list of all the places you could reside in your retirement years is the best approach to choose your future retirement location.
In summary? It is insufficient to retire to a place where social security or pension taxes apply. To make the most financially sound retirement decision, it is important to take your total tax burden into account.
Now that we have that out of the way, let’s look at the states that don’t tax retirement income and assess how welcoming they are in general.
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Top 14 US States That Don’t Tax Retirement Income
14. Alaska
Score: 5
The tax system is quite tax-friendly.
Index of Cost of Living: 125.2
Alaska is one of the states that does not tax retirement income. Seniors’ whole retirement income is tax-free because the state does not impose income taxes. In addition, the state does not impose an estate or inheritance tax or a sales tax. This state solely imposes a property tax, which is the only notable tax and is 1.17% higher than the federal average. Furthermore, retirees may find living in Alaska to be financially advantageous.
This is due to the fact that the state provides incentives to people who decide to settle there permanently. This money, known as the Alaska Permanent Dividend fund, is distributed to all qualifying residents of Alaska. The severe weather and exorbitant expense of living in this state make it one of the worst places for seniors to retire on social security, so they might want to reconsider before moving there. This state has a staggering 25.2% higher cost of living than the national average.
13. Washington
Score: 5
Tax-Friendly: Friendly to the Tax Man
Index of Cost of Living: 116
Social Security and other retirement income are not subject to state income tax in the state of Washington. This is due to the state’s lack of an income tax, just like Alaska. The good news for local retirees is that they can continue to work part-time after retirement without paying taxes on their earnings. Although the state’s property tax rates are marginally lower than the national average, the high sales tax rate generates the majority of the state’s income. 6.5% is the sales tax rate across the state.
A few counties and localities have their own sales tax rates, which can reach 4%. Seniors may be required to pay a sales tax of up to 10.5% overall. Nonetheless, there are a few options for sales tax exemptions. Many seniors residing in Washington may lack the heart or energy to relocate, despite the state’s 16% higher cost of living than the national average. We’ve put together a list of some of the greatest spots in Washington for seniors like these to retire on social security.
12. New Hampshire
Score: 6.
Tax Liability: Reasonably tax liable
Index of Cost of Living: 114.1
New Hampshire is the next state on our list of nontaxing states for retirement income. Although social security and other retirement income are not subject to state taxation, dividends and interest are for the current tax year. The tax rate is 5% for taxable periods ending before December 31, 2023, 4% for taxable periods concluding on or after December 31, 2023, and 3% for taxable periods ending on or after December 31, 2024, according to the NH Department of Revenue Administration. Starting with taxable periods that begin after December 31, 2024, the I&D tax will be eliminated.
Notably, New Hampshire is among the few states without a sales tax. In addition to all the positive news, this state has some of the highest rates of property taxes in the nation. 2.09% is the average effective property tax rate, which is higher than the average for the country. In addition, this state’s cost of living is 14.1% greater than the national average.
11. Nevada
Score: 8
Tax-Friendliness: Exceptionally favorable
Index of Cost of Living: 101
There is no state income tax in the state of Nevada. Seniors in the state receive a variety of retirement incomes tax-free as a result. Considering that it is a sunny state with a cost of living that is comparable to the national average, Nevada can make an excellent retirement destination. The state has low property taxes but a higher sales tax than the federal average. In Nevada, retirees can make the most of their money and even live off on social security. With an average retirement age of 63 years, this tax-friendly state has one of the lowest in the US.
10. Florida
Score: 9.
Tax friendliness: Extremely advantageous
Index of Cost of Living: 100.7
Florida is another state on our list without an income tax. The largest attraction for seniors looking to retire to the beautiful state of Florida is that it’s one of the few states that doesn’t tax retirement income. Furthermore, property taxes and sales taxes are real. They are both, nevertheless, quite near to national marks. With a few exceptions, the state sales tax rate is 6%. When municipal sales tax rates are added together, the total may reach 8.25%. Florida is one of the most sought-after places in the US for retirement due to its pleasant, sunny weather, tax-friendly atmosphere, and cost of living that is almost comparable to the national average.
9. Pennsylvania
Score: 9.
Tax Liability: Reasonably tax liable
Index of Cost of Living: 95.6
Among the states that do not impose a social security tax is Pennsylvania. This tax-friendly state completely exempts retirement account payments and all social security benefits from federal taxes. Pension income is even exempt from taxes for seniors sixty years of age and above. The low cost of living in Pennsylvania is the icing on the tax-friendliness cake. Retirement incomes can be extended for retirees in this state because the cost of living is 4.4% less than the national average.
8. Texas
Score: 10
Tax Liability: Reasonably tax liable
Index of Cost of Living: 92.7
Texas is a tax-friendly place to retire because it doesn’t have an income tax. Given that all retirement income is tax-free for seniors and that the cost of living in this Lone Star state is lower than the national average, it can be an excellent place to retire. The bad news is that US sales and property taxes are among the highest. The state has one of the highest average effective tax rates in the nation, at 1.9%. Local sales tax can reach 2%, whereas the overall sales tax rate is approximately 6.25%. On less than $2,500 per month, retirees can live in some of Texas’ greatest communities.
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7. South Dakota
Score: 12
Tax friendliness: Extremely advantageous
Index of Cost of Living: 92.4
South Dakota is the next state on our list of states that don’t tax retirement income. All forms of retirement income are tax-free because the state does not impose an income tax. Even the sales tax in this state is modest, which contributes to its tax-friendly status. Seniors can help mitigate the rather high property tax rates in the meantime. This is because this state’s cost of living is 7.6% less than the national average.
Seniors in South Dakota can even take advantage of the Homestead Exemption Program. Through this arrangement, a person can postpone paying property taxes until after the residence has been sold. With an annual interest rate of 4%, the property taxes accrue, but the duty to pay them only becomes apparent when the property is transferred. Seniors who are 70 years of age or older, or the surviving spouse of someone who was previously eligible, are eligible for this exemption. They also need to have owned a home for at least three years or been a resident of this state for at least five years.
6. Wyoming
Score: 12.
Tax friendliness: Extremely advantageous
Index of Cost of Living: 92.4
Like many other US states, Wyoming does not impose an income tax. This implies that the state does not impose taxes on any form of retirement income, including social security benefits. Seniors will find this state to be particularly tax-friendly because it also has some of the lowest property and sales taxes in the nation. At 0.6%, the average effective property rate is among the lowest in the United States. Sales taxes are also not very high. The combined rate of local and sales taxes is 5.36%, with the sales tax rate being 4%. The cherry on top is that this state’s cost of living is 7.6% cheaper than the national average. Wyoming is a desirable destination for people looking for a tranquil and profitable retirement due to its beautiful scenery, plenty of outdoor activities, and affordable cost of living.
5. Iowa
Score: 13.
Tax friendliness: In a moderate amount
Index of Cost of Living: 90.3
Iowa is the next state on our list of non-taxing states on retirement income. The only state on our list that is somewhat tax-friendly is Iowa. Seniors who are 55 years of age or older can get tax exemptions on their retirement income, which includes annuities, pensions, 401(k) and IRA distributions, as well as other assets. This state levies a 6% sales tax, with a combined statewide rate of 7% collected from 18 counties. Seniors can, however, take advantage of various exemptions, including those for food, prescription medications, and some non-prescription pharmaceutical categories. Still, this state has a relatively low cost of living—about 9.7% less than the national average. Its inclusion in our top five is a result of this.
4. Illinois
Score: 13.
Tax Liability: Reasonably tax liable
Index of Cost of Living: 92.1
Another tax-friendly state that seniors may want to think about for their retirement years is Illinois. Seniors do not have to pay the state’s flat income tax rate of 4.95% on their retirement income. Social Security, pension, and distributions from plans like 401(k)s and IRAs are all included in this income. Though not totally tax-free, the state is renowned for having some of the highest property and sales taxes in the nation.
With an estimated 2.2% effective property tax rate, it is the second highest rate in the nation. In this state, purchasing a home as a senior entails paying high taxes. Senior citizens are eligible for a special homestead exemption known as the Senior Citizen Homestead Exemption. Under this program, those who meet specific qualifications and are 65 years of age or older can postpone paying all or a portion of their principal residence’s real estate taxes and special assessments, up to a set amount.
3. Tennessee
Score: 14.
Tax Liability: Reasonably tax liable
Index of Cost of Living: 90.3
Tennessee doesn’t have its own income tax, even though you will always be required to pay federal taxes wherever you reside. This implies that state taxes are not applied to social security benefits or income from retirement funds. The state is tax-friendly for retirees due to its cheap property taxes. However, sales tax may have a significant negative impact on Tennessee residents. While the established sales tax rate is 7%, the combined average state and municipal sales tax rate can reach as high as 9.61%. The cost of living can help offset some of this since living expenses are 9.7% lower than the national average.
2. Alabama
Score: 16.
Tax Liability: Reasonably tax liable
Index of Cost of Living: 88.3
What makes Alabama one of the top five states that don’t tax retirement income if it doesn’t fully exempt it from taxes? The cost of living is quite inexpensive. Living expenses in the state are 11.7% less than the national average, even though the state completely taxes withdrawals from retirement savings. Retirement account income is subject to regular income taxation, with state income tax rates varying from 2% to 5%.
1. Mississippi
Score: 18.
Tax friendliness: Extremely advantageous
Index of Cost of Living: 86.3
All types of retirement income are tax-free in the state of Mississippi. The cost of living in the state is 13.7% less than the national average, and it experiences mild winters. The state even has a moderate sales tax and low property taxes. For elders, there is a homestead exemption available.
