License or reprint this slide show
printer-friendly without images

Slide Show | September 2014

10 Most Tax-Friendly States for Retirees

slideshow image

These 10 states impose the lowest taxes on retirees, according to Kiplinger’s 2014 analysis of state taxes. All of them exempt Social Security benefits from state taxes. Most also exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)

This year, we also looked at states’ capital gains tax rates because the six-year-long bull market has left many seniors with sizable gains in their taxable portfolios. Unlike the federal government, which applies lower rates to long-term gains (the profit from the sale of assets owned over one year), most states tax both short- and long-term gains at ordinary income tax rates. That adds to the appeal of states with no income tax, which are attractive to seniors with sizable nest eggs. They can take profits without having to worry about a big state tax bill (although they may still have to fork over federal taxes). Adding the state tax on profits to our criteria leads us to drop otherwise retiree-friendly South Carolina from our top ten list. Its top income tax rate of 7% kicks in once income exceeds $14,400. South Dakota, which has no income tax, takes its place on our list of the most tax-friendly states for retirees. Nevada, another no-income-tax state that also has relatively low property taxes, moves up to No. 3 on our list.

Before packing your bags and moving to a state with no income tax, though, pay attention to the trade-offs. Some states with no income tax impose above-average sales taxes or tax a broader array of goods and services. Property taxes may be higher, too.

SOURCES: State tax departments, CCH and the Tax Foundation.


10 Most Tax-Friendly States for Retirees

#1 Alaska

slideshow image

Kennecott, AK | Courtesy Henry via Wikimedia Commons

State Income Tax: None
State Sales Tax: None
Estate Tax/Inheritance Tax: No/No

The Last Frontier is a tax paradise for retirees who don't mind long, dark winters and bears in their backyards. The clincher: The state sends all permanent residents an annual dividend check from the state's oil wealth savings account. The 2014 payout will be $1,884 per person, state officials just announced.

The median property tax on the state's median home value of $232,900 is $2,422, according to the Tax Foundation, a nonprofit organization in Washington, D.C. But homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed value of their property.

While Alaska doesn't have a sales tax, 104 municipalities impose local sales taxes of up to 7%. The statewide average is 1.69%, according to the Tax Foundation.

#1 Alaska

#2 Wyoming

slideshow image

MedicineWheel | Courtesy U.S. Forest Service via Wikimedia Commons

State Income Tax: None
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

The Equality State is tax-friendly to all residents, especially retirees. Thanks to abundant state revenues from oil and mineral rights, the average state and local combined tax rate for all residents is 6.89%, the lowest in the U.S., according to the Tax Foundation.

Median property taxes are low for a home on the range -- $1,058 on a $184,000 median-valued home. Even better for seniors, those who meet income requirements are eligible for a refund of up to $900 ($800 for single filers) of property taxes, utilities and sales/use taxes. The state sales tax is low as well.

#2 Wyoming

#3 Nevada

slideshow image

Fort Churchill | Courtesy Kelapstick via Wikimedia Commons

State Income Tax: None
State Sales Tax: 6.85%
Estate Tax/Inheritance Tax: No/No

The Silver State offers retirees a jackpot of tax savings. Again, there’s no state income tax. Food and prescription drugs are exempt from the state’s 6.85% sales tax, but counties may add up to an additional 1.25%.

All property in the state is subject to tax by the state, counties, cities, towns and school districts. The median property tax on a $207,600 median-valued home is $1,749, according to the Tax Foundation. That's relatively low. There are no property tax breaks for seniors, however.

#3 Nevada

#4 Georgia

slideshow image

Andersonville Monuments | Courtesy Jud McCranie via Wikimedia Commons

State Income Tax: 1% to 6%
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

Retirees looking for tax relief may want to take a midnight train to the Peach State. Social Security income is exempt from state taxes, and so is up to $35,000 of most types of retirement income for residents age 62 to 64. For those 65 and older, the exemption is $65,000 (or $130,000 per couple).

Retirement income includes income from pensions and annuities, interest income, dividend income, net income from rental property, capital gains income, and the first $4,000 of earned income, such as wages.

The statewide sales tax is low (food and prescription drugs are exempt), but jurisdictions can add up to an additional 4% of their own taxes.

A Georgia homeowner may pay a combination of county, city, school and state taxes, depending on location. The median property tax on a $162,800 median-valued home is a low $1,346, according to the Tax Foundation. Plus individuals age 65 and older are eligible for an exemption from all state property taxes on their home and up to ten acres of land. The state property tax is being phased out by 2016.

#4 Georgia

#5 Arizona

slideshow image

Canyon de Chelly | Courtesy Hydrargyrum via Wikimedia Commons

State Income Tax: 2.59% to 4.54%
State Sales Tax: 5.6%
Estate Tax/Inheritance Tax: No/No

The Grand Canyon State has an income tax, although it is relatively low compared with other states. But Social Security benefits are exempt, as is up to $2,500 of some other retirement income. The state's top income tax rate doesn't kick in until income hits $150,000 ($300,000 for married couples).

Tax jurisdictions set property tax rates, which vary considerably from one area to another. On average, though, Arizona has some of the lowest property taxes in the U.S., according to the Tax Foundation. The median property tax on a $187,700 median-valued home is $1,356, according to the Tax Foundation.

One note of caution: Arizona's statewide sales tax of 5.6% can climb to 12% when combined with local sales taxes. But food for home consumption and prescription drugs are exempt from the state sales tax.

#5 Arizona

#6 Mississippi

slideshow image

Vicksburg Cemetery | Courtesy JGKlein via Wikimedia Commons

State Income Tax: 3% to 5%
State Sales Tax: 7%
Estate Tax/Inheritance Tax: No/No

The Magnolia State offers a sweet income tax deal for retirees. Social Security benefits and income from IRAs, 401(k)s, 403(b)s, Keoghs, and public and private pension plans are exempt from state income taxes.

Prescription drugs, residential utilities, motor fuel, newspapers and health care services are exempt from state sales taxes.

Mississippi is also home to some of the lowest property taxes in the nation, according to the Tax Foundation. The median property tax on a $98,000 median-valued home is $508, the Tax Foundation calculates. Seniors who are eligible for the state's homestead exemption are exempt from taxes on the first $75,000 of value.

#6 Mississippi

#7 Delaware

slideshow image

Harbor of Refuge Lighthouse | Courtesy U.S. Army Corps of Engineers
via Wikimedia Commons

State Income Tax: 2.2% to 6.75%
State Sales Tax: None
Estate Tax/Inheritance Tax: Yes/No

The First State is the tax-friendliest state in the Northeast. Social Security benefits are exempt from state income taxes. Residents 60 and older can exclude $12,500 per person of qualified pension benefits and investment income, including dividends, interest and capital gains, from income taxes. Taxpayers 65 and older who don't itemize are eligible for an additional standard deduction of $2,500 on top of the state's regular $3,250 standard deduction.

Real estate is subject to county, school district, vocational school district and municipal property taxes. Property is assessed at different percentages of market value, according to locality. The median property tax on a $249,400 median-valued home is $1,078, according to the Tax Foundation. Homeowners 65 and older are eligible for a credit equal to half of their school property taxes, up to $500. Residents who moved to Delaware after December 31, 2012, must live in the state for three consecutive years to qualify for the credit.

Delaware's estate tax mirrors the federal estate tax: In 2014, $5.34 million is exempt. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.

#7 Delaware

#8 Louisiana

slideshow image

Jackson Square | Courtesy Bobak via Wikimedia Commons

State Income Tax: 2% to 6%
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

As they say in New Orleans, let the good times roll. The Pelican State exempts Social Security and military, civil-service, state and local government pensions from state income taxes. For residents 65 and older, up to $6,000 of private pensions, annuity income and IRA distributions are also exempt from income taxes.

Local parishes and jurisdictions within those parishes may add their own sales taxes to the state tax, which can boost the total to 10.75%. Food, drugs, wheelchairs and prosthetic devices are exempt from the state sales tax, but they may be taxed locally.

Average property taxes are the third-lowest in the nation, according to the Tax Foundation. The median tax on a $135,400 median-valued home is $243 a year, the Tax Foundation calculates. Retirees who are 65 or older with adjusted gross income of less than $70,484 are eligible to have their home's assessed value frozen for as long as they live in the home.

#8 Louisiana

#9 South Dakota

slideshow image

Mt Rushmore | Courtesy Dean Franklin via Wikimedia Commons

State Income Tax: None
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

The Mount Rushmore State offers a friendly tax panorama for retirees. There is no state income tax, so Social Security benefits and other forms of retirement income get a free ride. Sales taxes are relatively low, although they cover a broad scope of services.

South Dakota’s average property taxes are higher than those in other tax-friendly states, according to the Tax Foundation, which ranks it 16th based on property taxes as a percentage of home value. Seniors 65 and older qualify for an assessment tax freeze and/or municipal property-tax reduction if their income is less than $26,566 for individuals ($33,208 for married couples) and the value of the home is less than $182,358.

#9 South Dakota

#10 Florida

slideshow image

Fort Zachary Taylor | Courtesy Ebyabe via Wikimedia Commons

State Income Tax: None
State Sales Tax: 6%
Estate Tax/Inheritance Tax: No/No

No, we haven’t overlooked the Sunshine State, home of so many retirees for many reasons, including taxes. Florida has no state income tax. Combined state and local sales taxes, though, can go as high as 7.5%.

All property is taxable at 100% of its market value. Residents are eligible for a homestead exemption of up to $50,000. Some city and county governments give residents age 65 and older who meet certain income limits an additional homestead exemption of up to $50,000. The median tax on a $182,400 median-valued home is $1,773, according to the Tax Foundation.

#10 Florida

10 Most Tax-Friendly States for Retirees -- 2013 Rankings

slideshow image

Thinkstock

1. Alaska
2. Wyoming
3. Georgia
4. Arizona
5. Mississippi
6. Delaware
7. Nevada
8. Louisiana
9. South Carolina
10. Florida

Kiplinger updates these rankings annually. Above is our 2013 list of the ten most tax-friendly states for retirees. The list is based on Kiplinger's analysis of state tax laws; information is gathered from state tax department Web sites, CCH and the Tax Foundation.

10 Most Tax-Friendly States for Retirees -- 2013 Rankings

You Might Also Like...

10 Least Tax-Friendly States for Retirees

What's Next

10 Least Tax-Friendly States for Retirees

These 10 states impose the highest taxes on retirees, according to Kiplinger’s 2014 analysis of state taxes. Five...

Read More »


This page printed from: http://www.kiplinger.com/slideshow/retirement/T006-S001-10-most-tax-friendly-states-for-retirees/index.html

All contents © 2014 The Kiplinger Washington Editors