10 Worst States for Taxes on Retirees

Retirees have special concerns when evaluating state tax policies: Are Social Security benefits taxed? Does the state impose its own estate tax? Are there property tax breaks for seniors? The answers can greatly affect the financial well-being of fixed-income retirees.

These 10 states impose the highest taxes on retirees, according to Kiplinger's 2015 analysis of state taxes. Three of them treat Social Security income just like Uncle Sam does -- taxing up to 85% of your benefits. Exemptions for other types of retirement income are limited or nonexistent in these states. Property taxes are on the high side, too. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)

Take a look.

State Income Tax: 4% (on income up to $8,200/individual, $16,450/joint) to 8.82% (on income more than $1,046,350/individual, $2,092,800/joint)

State Sales Tax: 4%

Estate Tax/Inheritance Tax: Yes/No

On average, New Yorkers fork over 12.6% of their income in state and local taxes, according to the Tax Foundation. But retirees catch several breaks.

The state doesn't tax Social Security benefits or public pensions. It also excludes up to $20,000 for private pensions, out-of-state government pensions, IRAs and distributions from employer-sponsored retirement plans.

Food and prescription and nonprescription drugs are exempt from state sales taxes, as are greens fees, health club memberships, and most arts and entertainment tickets. Depending on where you shop, though, sales taxes on everything else can be steep. The average state and local combined sales tax rate is 8.48%, according to the Tax Foundation.

The median property tax on the state's median home value of $277,600 is $4,559, the 11th-highest rate in the U.S.

While New York has an estate tax, a law that took effect last year will make it less onerous. For fiscal year 2014 to 2015, estates valued at $2,062,500 are subject to an estate tax with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting January 1, 2019, it will be indexed to the federal exemption, which is $5.43 million for 2015.

State Income Tax: 1.4% (on income up to $20,000) to 8.97% (on income more than $500,000)

State Sales Tax: 7%

Estate Tax/Inheritance Tax: Yes/Yes

The Garden State's tax policies create a thicket of thorns for some retirees. Its property taxes are the highest in the U.S., according to the Tax Foundation. While Social Security benefits, military pensions and some retirement income are excluded from state taxes, other retirement income could be taxed as much as 8.97%.

Residents 62 or older may exclude as much as $15,000 ($20,000 if married filing jointly) of retirement income, including pensions, annuities, IRAs, and 401(k) and employer-sponsored retirement plan distributions, if their gross income is $100,000 or less.

The median property tax on the state's median home value of $307,700 is $7,331.

New Jersey is one of only two states (Maryland is the other) that impose an inheritance tax 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.

State Income Tax: 2.46% (on income up to $3,000/individual, $6,000/joint) to 6.84% (on income above $29,460/individual, $58,920/joint)

State Sales Tax: 5.5%

Estate Tax/Inheritance Tax: No/Yes

The Cornhusker State taxes Social Security benefits, but new rules that took effect this year will exempt some of that income from state taxes. Nebraska taxes most other retirement income, including retirement-plan withdrawals and public and private pensions. And the top rate kicks in pretty quickly: It applies to taxable income above $29,460 for single filers and $58,920 for married couples filing jointly.

Starting in 2015, residents can subtract Social Security income included in federal adjusted gross income if their adjusted gross income is $58,000 or less for married couples filing jointly or $43,000 for single residents.

Food and prescription drugs are exempt from sales taxes. Local jurisdictions can add an additional 2% to the state rate. The average state and local combined sales tax rate is 6.8%.

The median property tax on the state's median home value of $132,700 is $2,438, the seventh-highest in the U.S.

Nebraska's inheritance tax is a local tax administered by counties, ranging from 1% to 18%. Assets left to a spouse or charity are exempt.

State Income Tax: 1% (on income up to $7,749/individual, $15,498/joint) to 13.3% (on income above $1,000,000/individual, $1,039,374/joint)

State Sales Tax: 7.5%

Estate Tax/Inheritance Tax: No/No

California exempts Social Security and Railroad Retirement benefits, but all other forms of retirement income are fully taxed. That's significant, because wealthier residents of the Golden State pay the highest state income taxes in the U.S.

Early retirees who take withdrawals from their retirement plans before age 59 1/2 pay a 2.5% state penalty on top of the 10% penalty usually imposed by the IRS.

At 7.5%, state sales taxes are high, and local taxes can push the combined rate as high as 10%. The average combined state and local sales tax rate is 8.44%. California also has some of the highest gas taxes in the U.S., at 41 cents per gallon.

The median property tax on the state's median home value of $373,100 is $3,015.

State Income Tax: 1.0% (on income up to $2,800) to 6.9% (on income above $17,000)

State Sales Tax: None

Estate Tax/Inheritance Tax: No/No

You won't pay sales tax to shop in the Treasure State, but that may be small comfort when you get your state tax bill. Montana taxes most forms of retirement income, including Social Security benefits.

Montana allows a pension-exemption of as much as $3,980 per person if federal adjusted gross income is $35,190 or less.

Property taxes are slightly lower than average here. The median property tax on the state's median home value of $190,100 is $1,630.

State Income Tax: 5% (on income up to $3,300/individual, $6,600/joint) to 9.9% (on income over $125,000/individual, $250,000/joint)

State Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No

The Beaver State's top income-tax rate of 9.9% hits residents earning more than $125,000 ($250,000 for married couples filing jointly). Although Oregon doesn't tax Social Security benefits, most other retirement income is taxed at your top income tax rate. However, you can deduct as much as $6,250 of federal income taxes paid on your Oregon return, and there is a retirement-income credit for seniors with certain income restrictions.

One bright spot in Oregon's tax picture: No sales tax. You can buy anything in the state and never pay a penny in sales taxes.

Property taxes are average: The median property tax on the state's median home value of $229,700 is $2,494.

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

State Income Tax: 5.35% (on income up to $25,071/individual, $36,650/joint) to 9.85% (on income more than $154,950/individual, $258,261/joint)

State Sales Tax: 6.875%

Estate Tax/Inheritance Tax: Yes/No

The North Star State is a chilly tax climate for retirees. Social Security income is taxed to the same extent as it is on your federal return. Pensions are taxable regardless of whether they are military, government or private pensions. Income tax rates and the sales tax rate are high.

Food, clothing, and prescription and nonprescription drugs are exempt from state sales tax. A few cities and counties also add a sales tax.

The median property tax on the state's median home value of $180,100 is $2,148. Minnesota 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 $1.4 million at rates ranging from 10% to 16%. Assets left to a surviving spouse are exempt.

State Income Tax: 3.75% (on income up to $60,550) to 5.99% (on income more than $137,650)

State Sales Tax: 7%

Estate Tax/Inheritance Tax: Yes/No

Rhode Island, which was first on our 2014 list, became a little less unfriendly this year after lawmakers approved a budget that exempts Social Security benefits from state taxes for single filers with up to $80,000 in adjusted gross income and married filers with up to $100,000 in AGI starting in 2016. Still, Rhode Island taxes most other sources of retirement income, including pension income.

Groceries, most clothing and footwear, and prescription drugs are exempt from sales tax. Over-the-counter drugs such as aspirin are taxed, unless you have a prescription.

The median property tax on the state's median home value of $232,300 is $3,872, the 10th-highest in the U.S., according to the Tax Foundation. Homeowners 65 and older who earn $30,000 or less can get a state tax credit of up to $305 under the statewide property-tax relief program.

Estates valued at more than $1.5 million are subject to Rhode Island's estate tax, which takes 16% of the amount greater than the threshold. Assets left to a surviving spouse are exempt.

State Income Tax: 3% (on income up to $10,000/individual, $20,000/joint) to 6.7% (on income above $500,000/individual, $1,000,000/joint)

State Sales Tax: 6.35% for most items; 7.8% 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 fourth-highest in the nation, according to the Tax Foundation. Most types of retirement income are taxed, along with a portion of Social Security benefits for taxpayers above certain income thresholds.

Social Security is exempt for individual taxpayers with federal adjusted gross income of less than $50,000 and for married taxpayers filing jointly with federal AGI below $60,000. Retirement plans, private pensions, and out-of-state government and federal civil-service pensions are fully taxed. All federally taxable military income is exempt.

There are no local sales taxes in Connecticut, so you'll pay only the statewide rate of 6.35% on your purchases. As of July 1, clothing and shoes under $50 are no longer exempt from the state sales tax. Luxury items, such as jewelry worth more than $5,000, are taxed at 7.8%, which means a $6,000 diamond ring would cost you $6,468.

Median property tax on the state's median home value of $267,000 is $5,280.

Connecticut imposes a tax on estates valued at $2 million or more, at a progressive rate starting at 7.2%. The rate rises to a maximum of 12% for an estate valued above $10.1 million. Connecticut is the only state with a gift tax, which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents.

State Income Tax: 3.55% (on income up to $37,450/individual, $62,600/joint) to 8.95% (income more than $411,500)

State Sales Tax: 6%

Estate Tax/Inheritance Tax: Yes/No

The Green Mountain State doesn't coddle retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont treats Social Security benefits the same way the federal government does, which means as much as 85% of your benefits could be taxed.

In an effort to close the state's $100 million budget gap, Vermont now limits deductions to $15,750 for single residents and $31,500 for married couples. With that in mind, Vermont moves up to the unenviable top spot on our list of least tax-friendly states for retirees.

Local jurisdictions can add 1% to the state sales tax. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But 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.

The median property tax on the state's median home value of $218,300 is $3,727, the ninth-highest in the U.S., according to the Tax Foundation. Eligible Vermont residents can make a claim for a rebate of their school and municipal property taxes if their household income does not exceed a certain level. (Generally, household incomes of $109,000 or more do not receive an adjustment.)

Vermont taxes estates that exceed $2.75 million at a flat rate of 16% on the amount greater than the threshold. Assets left to a surviving spouse are exempt.

SEE ALSO: 10 Best States for Taxes on Retirees

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

Kiplinger updates these rankings annually. Above is our 2014 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.