These 10 states impose the highest taxes on retirees, according to Kiplinger’s 2014 analysis of state taxes. Five of them treat Social Security benefits just like Uncle Sam—taxing up to 85%. Exemptions for other types of retirement income are limited or nonexistent. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)

This year, we also looked at states’ capital gains rates because the six-year-long bull market has left many retirees with larger taxable portfolios. While investors typically pay lower federal tax rates on long-term capital gains, most states treat capital gains like ordinary income, notes Kyle Pomerleau, an economist for the Tax Foundation. That can take an unexpected bite out of the investment income of retirees who live in states with high income tax rates. For example, the top combined federal and state capital gains tax rate in California is 33%, according to the Tax Foundation, almost 10 percentage points higher than the fed’s top 23.8% tax rate on such profits.

Most retirees keep a close watch on their expenses, and they tend to vote in large numbers. That may explain why lawmakers in several states have attempted to make their environs more welcoming for older residents. In the past year, Maine increased the amount of pension income that’s excluded from state taxes. Nebraska boosted its exemption for Social Security income, starting in 2015. And New York and Maryland moved to gradually increase their estate tax exemptions to match the federal exclusion (currently $5.34 million).

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

By Sandra BlockSee my bio, plus links to all my recent stories.
Follow @sandyblock

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10 Least Tax-Friendly States for Retirees

State Income Tax: 3.75% to 5.99%
State Sales Tax: 7%
Estate Tax/Inheritance Tax: Yes/No

Even though Rhode Island has dropped its top income tax rate from 9.9% to 5.99%, the Ocean State’s tax rates remain among the highest in the U.S. Social Security benefits are taxed to the same extent as they are by the federal government—up to 85%. The state also taxes virtually all other sources of retirement income, including pension income.

Rhode Island's average property taxes as a percentage of home value are the 11th-highest in the U.S. The median property tax on the state's median home value of $267,100 is $3,618, according to the Tax Foundation.

Estates valued at more than $921,655 are subject to Rhode Island's estate tax. The maximum rate is 16%. Assets left to a surviving spouse are exempt.

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#1 Rhode Island

State Income Tax: 3.55% to 8.95%
State Sales Tax: 6%
Estate Tax/Inheritance Tax: Yes/No

The Green Mountain State taxes most retirement income. Again, Social Security benefits are taxed to the same extent as they are by the federal government—up to 85%.

In addition to the state sales tax, local jurisdictions may add 1%. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But when in Vermont, you’ll pay 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.

Vermont's property taxes are the seventh-highest in the U.S., according to the Tax Foundation. The median property tax on a $216,300 median-valued home is a steep $3,444. Real estate taxes have two components: school property tax and municipal property tax. Both taxes are billed and collected by the town or city where the real estate is located. A statewide education tax is imposed on all nonresidential and homestead property. There are no property tax breaks specifically for seniors; however, residents with income of less than $99,000 may be eligible for a rebate of their school and municipal property taxes. The maximum adjustment is $8,000.

Vermont taxes estates that exceed $2.75 million. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.

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#2 Vermont

State Income Tax: 3.0% to 6.7%
State Sales Tax: 6.35% (7.0% for certain luxury items)
Estate Tax/Inheritance Tax: Yes/No

The Constitution State is a tax nightmare for many retirees. Its real estate taxes are the 10th-highest in the nation, according to the Tax Foundation. Half of military retirement pay is excluded from taxes, but there are no exemptions or tax credits for other types of pensions or other retirement income. The state taxes a portion of Social Security benefits for single taxpayers with federal adjusted gross income of more than $50,000 and married taxpayers filing jointly with federal AGI of more than $60,000.

The median property tax on a $291,200 median-valued home is a hefty$4,738, according to the Tax Foundation. Property taxes are assessed and collected by individual towns or other taxing districts. Married couples who are 65 or older with income of $39,500 or less are eligible for a property tax credit of up to $1,250.

Connecticut taxes estates valued at $2 million or more at a progressive rate, starting at 7.2%, with a maximum rate of 12%. Assets left to a surviving spouse are exempt.

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#3 Connecticut

State Income Tax: 5.35% to 9.85%
State Sales Tax: 6.875%
Estate Tax/Inheritance Tax: Yes/No

Maybe long winters aren't the only reason seniors leave this state for warmer climes. The North Star State taxes Social Security income to the same extent as the federal government (up to 85%). Pensions are taxable regardless of whether they're military, government or private pensions. In 2013, the state added a new top income tax rate of 9.85% on taxable income of more than $150,000 for single filers and more than $250,000 for joint filers.

Food, clothing, and prescription and nonprescription drugs are exempt from the state sales tax. A few cities and counties add their own sales tax.

The median property tax on a $200,400 median-valued home is $2,098, according to the Tax Foundation. Homeowners of any age may be eligible for a state-paid refund for homeowners whose property taxes are high relative to their incomes.

Minnesota taxes estates valued at more than $1.2 million. Assets left to a surviving spouse are exempt. The maximum estate tax rate is 16%. In March, Minnesota repealed a gift tax that had been in effect for less than a year. Minnesota lawmakers also voted to increase the state’s estate tax threshold by $200,000 a year until it reaches $2 million in 2018.

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#4 Minnesota

State Income Tax: 5.0% to 9.9%
State Sales Tax: None
Estate Tax/Inheritance Tax: Yes/No

The Beaver State has no sales tax, but its income tax is one of the highest in the U.S. Taxable income of more than $125,000 ($250,000 for married couples filing jointly) is taxed at 9.9%. Although Oregon doesn't tax Social Security benefits, most other retirement income is taxed. Oregon’s top federal and state capital gains rate is 31%, the third-highest in the U.S. For that reason, Oregon moves above Montana in this year’s list of tax-unfriendly states.

Oregon allows residents to subtract their current year’s federal income tax liability, after credits, up to $6,250 based on income and filing status. There is also a retirement-income credit for seniors with certain income restrictions.

For property taxes, counties assess home values and set tax rates. The median property tax on a $257,400 median-valued home is $2,241, according to the Tax Foundation. Homeowners 62 or older who have household income of up to $42,000 in 2014 may defer paying property taxes. But taxes are due when the homeowner sells the property, no longer lives there permanently or dies.

Oregon's estate tax applies to estates valued at more than $1 million. The top rate is 16%. Assets left to a surviving spouse or registered domestic partner are exempt.

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#5 Oregon

State Income Tax: 1.0% to 6.9%
State Sales Tax: None
Estate Tax/Inheritance Tax: No/No

The Treasure State is one of five states that do not impose a general sales tax. That's the good news. The bad news is that it taxes most forms of retirement income. In addition, its top tax rate kicks in on taxable income of more than $16,700. The state allows a pension- and annuity-income exemption of up to $3,900 per person, subject to certain income limitations. Residents 65 and older can exclude up to $1,600 of interest income from state taxes.

While there's no general sales tax, retirees relocating to enjoy Big Sky country may not like Montana's tourist taxes. There's a 3% tax on accommodations and campgrounds, and a 4% tax on rental vehicles. Montana allows tourism-dependent local communities to impose a local option sales tax of up to 3%.

The median property tax on a $176,300 median-valued home is $1,465, according to the Tax Foundation. One bright spot: Homeowners and renters who are 62 or older are eligible for a refundable income tax credit worth up to $1,000 if they have lived in Montana for nine months, occupied a residence for six months and have a gross household income of less than $45,000.

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#6 Montana

State Income Tax: 1.0% to 13.3%
State Sales Tax: 7.5%
Estate Tax/Inheritance Tax: No/No

Living in the Golden State is no day at the beach for retirees. Although Social Security benefits are exempt, all other forms of retirement income are fully taxed. Retirees who take withdrawals from their retirement plans before age 59 1/2 pay a 2.5% penalty on top of the 10% penalty usually imposed by the IRS.

California residents pay the highest income tax rates in the U.S. The top rate of 13.3% kicks in on income of more than $1 million for singles and married couples who file jointly. Investors are hard hit, too: Well-off investors pay up to 33% in combined federal and state taxes on their capital gains, according to the Tax Foundation.

The state sales tax is 7.5%, and sales taxes are even higher in cities and counties with special taxing districts; in some cities, the combined rate is as high as 10%. Food and prescription drugs are exempt.

Property is assessed at 100% of market value, but taxes are capped at 1% of assessed value. Under the homestead program, the first $7,000 of the full value of a homeowner's dwelling is exempt. The median property tax on a $384,200 median-valued home is $2,839, according to the Tax Foundation. There are no property tax breaks for retirees.

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#7 California

State Income Tax: 2.46% to 6.84%
State Sales Tax: 5.5%
Estate Tax/Inheritance Tax: No/Yes

The Cornhusker State has tried to become more hospitable to retirees, so it moves down to eighth on our list (from seventh in 2013). In 2014, Social Security benefits will be taxed to the same extent that they are on your federal return. Starting in 2015, though, married couples with adjusted gross income of $58,000 or less and single taxpayers with AGI of $43,000 or less won’t have to pay taxes on their benefits. Income tax rates were lowered slightly in 2013, and changes in tax bracket thresholds in 2014 will lower tax bills slightly, too.

Income tax rates range from a low of 2.46% to a high of 6.84% on income of more than $29,000 for single filers and more than $58,000 for married couples.

Also starting in 2015, military retirees may make a one-time election within two calendar years after the date of retirement from the military. A military retiree can choose to exclude 40% of his or her military retirement benefit income for seven consecutive taxable years or can exclude 15% of military retirement benefit income for all taxable years beginning with the year the retiree turns 67.

Real estate is assessed at 100% of fair market value, except for agricultural land, which is assessed at 75% of market value. The median property tax on a $123,300 median-valued home is $2,164, according to the Tax Foundation. Nebraska has the sixth-highest property taxes in the U.S., based on average taxes paid as a percentage of home value, according to the Tax Foundation. Seniors over age 65 who earn less than $26,900 ($31,600 for married couples) are eligible for an exemption of up to $40,000 or 100% of the county's average assessed value of single-family residential properties, whichever is greater.

Nebraska's inheritance tax ranges from 1% to 18%, depending on the recipients' relationship to the deceased. Assets inherited by a spouse or charity are exempt.

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#8 Nebraska

State Income Tax: 1.4% to 8.97%
State Sales Tax: 7.0%
Estate Tax/Inheritance Tax: Yes/Yes

The Garden State has the highest state and local property taxes in the U.S., according to the Tax Foundation. The median property tax on a $348,300 median-valued home is $6,579, according to the Tax Foundation. Seniors 65 and older who have lived in the state for at least 10 years and meet certain income limits are eligible for reimbursement of increases in their property taxes.

New Jersey does offer retirees some tax breaks on income. It doesn't tax Social Security benefits or military retirement pay. Residents 62 or older may exclude up to $15,000 ($20,000 if married filing jointly) of retirement income, including pensions, annuities and IRA withdrawals, if their gross income is $100,000 or less.

New Jersey is one of only a couple of states that impose an inheritance and an estate tax. (An estate tax is levied before the estate is distributed; an inheritance tax is paid by the beneficiaries.) In general, close relatives are excluded from the inheritance tax; others face tax rates ranging from 11% to 16% on inheritances of $500 or more. Estates valued at more than $675,000 are subject to estate taxes of up to 16%. Assets that go to a spouse or civil union partner are exempt.

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#9 New Jersey

State Income Tax: 4.0% to 8.82%
State Sales Tax: 4.0%
Estate Tax/Inheritance Tax: Yes/No

Although the Empire State offers generous tax exemptions for retirees, tax rates on non-retirement income can be punitive. The top rate for capital gains, for example, is 31.5% -- the second-highest rate in the nation after California, according to the Tax Foundation.

New York doesn't tax Social Security benefits or public pensions. There is also an exemption of up to $20,000 for private pensions, out-of-state government pensions, and distributions from IRAs and Keogh plans.

Food, prescription and nonprescription drugs, green fees, health club memberships, and most arts and entertainment tickets are exempt from the state sales tax. Local taxing entities impose additional sales taxes ranging from 3% to 4.75%.

Real estate is taxed at the local level. New York has a property tax cap of 2% or the rate of inflation -- whichever is lower -- on increases in the amount of taxes collected by localities. The median property tax on a $306,000 median-valued home is $3,755, according to the Tax Foundation. Seniors age 65 and older with income of $81,900 or less are eligible to exempt up to $63,300 of the value of their homes from school property taxes.

In the past year, New York has moved to make its estate tax less onerous. The state increased the exemption to $2,062,500 in 2014 (from $1 million in 2013). The threshold will gradually rise to match the federal exemption, which is currently $5.34 million. Assets left to a spouse are exempt.

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#10 New York

1. Rhode Island
2. Vermont
3. Connecticut
4. Minnesota
5. Montana
6. Oregon
7. Nebraska
8. California
9. New Jersey
10. New York

Kiplinger updates these rankings annually. Above is our 2013 list of the ten least 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.

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

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