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All Contents © 2016The Kiplinger Washington Editors
Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes – and how generous are the property tax breaks for seniors? Are Social Security benefits taxed? What about your other forms of retirement income, including IRAs and pensions? Does the state impose its own estate tax, which might subtract from your legacy? The answers could determine which side of the state border you’ll settle on in retirement.
These 10 states impose the lowest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. All of these states exempt Social Security benefits from state taxes. Most exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. But 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. And take a long view: Some low-tax states are facing fiscal difficulties that could force them to hike taxes in the future to remedy fiscal shortfalls.
By Sandra Block, Senior Associate Editor
| October 2016
The Volunteer State moves onto our most-friendly list this year for two reasons: It eliminated its inheritance tax as of January 1, and it reduced its tax on stock dividends and interest income—known as the Hall tax-- from 6% to 5%. The state plans to phase out the Hall tax entirely by 2022. Because the state has no income tax on other forms of income, your Social Security benefits, IRA distributions and pensions are unscathed.
Tennessee bumps Arizona from our list (Arizona, while still tax-friendly, taxes distributions from retirement plans at ordinary income rates).
The median property tax on the median home value of $142,900 in Tennessee is $1,066, the 13th-lowest rate in the U.S. Gas taxes are 21 cents a gallon, less than the national average of 30 cents.
Tennessee makes up for low taxes in other areas by charging high sales taxes. The combined state and local tax rate of 9.46% is the second-highest in the U.S. Groceries are taxed at 5% by the state, plus whatever local rate is in effect. Prescription drugs are exempt.
Finchlake2000 via Flickr/Creative Commons
The Pelican State offers a bayou full of tax breaks to retirees.
Social Security and military, civil service, and state and local government pensions are exempt from state income taxes. Residents can deduct all of their federal income tax from state taxable income.
As for other forms of retirement income, taxpayers 65 or older can exclude as much as $6,000 of income from IRA distributions, private pensions and annuity payouts.
The median property tax on the median home value of $143,600 is $710 because the state has the third-lowest property tax rate in the U.S. Gas taxes are just 20 cents a gallon, less than the national average of 30 cents.
Note: Louisiana is facing financial problems that could imperil its tax-favored status. In April, lawmakers voted to increase the state sales tax from 4% to 5% through June 30, 2018. As a result, the state’s average combined state and local sales tax rate of 9.9% is the highest in the U.S. Food, drugs, wheelchairs and prosthetic devices are exempt from the state sales tax, but they may be taxed locally.
Lee Cannon via Flickr/Creative Commons
The First State has no sales tax, and seniors can shelter a large chunk of retirement income from state income taxes. Social Security benefits are exempt from state taxes. Taxpayers 60 and older can also exclude $12,500 of income from IRAs, 401(k) plans and pensions from state taxes. For those younger than 60, $2,000 of investment and qualified pension income is exempt.
If you are 65 or older on December 31 and don’t itemize, you’re eligible for an additional standard deduction of $2,500.
Delaware has the fourth-lowest property taxes in the U.S. The median property tax on the median home value of $230,500 is $1,224. The gas tax is 23 cents a gallon, less than the national average of 30 cents.
Delaware is the only state on this list that imposes its own estate tax, but the good news is that it mirrors the federal estate tax: In 2016, $5.45 million is exempt. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.
Ever wonder why so many retirees have Georgia on their minds? The Peach State’s low tax climate may have something to do with it.
Social Security income is exempt from state taxes, and so is as much as $35,000 of most types of retirement income for those ages 62 to 64. For those 65 and older, the exemption is $65,000 per taxpayer. Retirement income includes pensions and annuities, interest, dividends, net income from rental property, capital gains, royalties and the first $4,000 of earned income.
The statewide sales tax is 4%, but jurisdictions can add as much as 4% of their own taxes. Food and prescription drugs are exempt.
The median property tax on the state’s median home value of $147,900 is $1,346, below average for the U.S. Full-time residents qualify for a homestead exemption, and seniors may qualify for additional deductions from property taxes.
National Park Service
The Sunshine State is very popular with retirees, not just because of its forgiving climate but also because it has no state income tax.
The median property tax on the median home value of $162,700 is $1,631, slightly below average for the U.S. Residents are eligible for a homestead exemption of as much as $50,000. Some city and county governments give residents age 65 and older who meet certain income limits an additional homestead exemption of as much as $50,000.
Sales taxes, though, can go as high as 7.5%, depending on where you live in the state.
The Mount Rushmore State offers a friendly tax environment 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 few products and services are exempt from them.
The median property tax on the median home value of $142,300 is $1,876, the 17th-highest rate in the U.S. However, South Dakota offers several property tax breaks for older homeowners, based on income and the value of the home.
Loco Steve via Flickr/Creative Commons
The tea is sweet in the Magnolia State, and so is the income tax environment for retirees. Mississippi not only exempts Social Security benefits from state income taxes, it also excludes withdrawals from IRAs and 401(k) plans, income from public and private pensions, and other types of qualified retirement income.
The median property tax on the median home value of $104,000 is $854, below average for the U.S. The Missouri Property Tax Credit Claim gives credit to certain senior citizens and disabled individuals for a portion of the real estate taxes or rent they have paid for the year.
Mississippi’s state sales tax rate of 7% is the second-highest in the U.S. (only California, at 7.5%, is higher), and Mississippi is one of a minority of states that charges sales tax on groceries. But prescription drugs, residential utilities, motor fuel and newspapers are all exempt, and localities add very little on top of the state’s rate, if anything.
Vehicle sales are taxed at 5%, two percentage points below the general sales tax rate. Mississippi also charges an annual personal property tax based on vehicles’ age and value. Rates are set at the county level. In Lafayette County, for example, you’d pay $285 on a vehicle valued at $20,000.
The Silver State offers retirees a jackpot of tax savings. There is no state income tax, so you can cash in your retirement plans without worrying about a big state tax bill.
Unlike some other states with no income taxes, Nevada doesn’t make up the difference with above-average property taxes. The median property tax on the state’s median home value of $192,100 is $1,426, the 12th-lowest rate in the U.S.
Food and prescription drugs are exempt from the state’s 6.85% sales tax, but counties may tack on as much as 1.3%. In addition to sales taxes, vehicle owners are charged an annual “government services tax” based on the vehicle’s value and age.
Thanks to abundant revenues that the state collects from oil and mineral rights, Wyoming residents shoulder one of the lowest tax burdens in the U.S. There is no state income tax, and the state sales tax is low.
The Equality State’s gas tax is 24 cents per gallon, below the national average of 30 cents, and Wyoming has the lowest beer tax in the U.S.
You won’t pay high property taxes to own a home on the range here. The median property tax on the state’s median home value of $201,000 is $1,206, the ninth-lowest in the U.S.
A special tax deal for seniors: Those who meet income requirements are eligible for a refund of as much as $900 ($800 for single filers) of property taxes, utilities and sales/use taxes.
The Last Frontier is a true tax haven for retirees (or anyone else who doesn’t mind wearing a sweater in June). Alaskans pay no state income tax, so Social Security benefits, retirement plan withdrawals and gains from your investments won’t be nicked by state taxes.
Alaska has no state sales tax, either, and Anchorage and Fairbanks, two of the state’s largest cities, impose no local sales tax. Alaska’s gas tax is just 12 cents a gallon, much less than the national average of 30 cents.
Bonus: The state sends all permanent residents an annual dividend check from the state’s oil wealth savings account. Alas, declining oil revenues have reduced this windfall: For 2016, the dividend is $1,022, down from $2,072 in 2015.
The median property tax on the median home value of $254,500 is $2,987. That’s in the costlier half of U.S. property tax rates overall, but it’s not outrageous. Homeowners 65 and older (or surviving spouses 60 and older) are exempt from municipal property taxes on the first $150,000 of assessed value of their property.
9. South Dakota
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