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All Contents © 2016The Kiplinger Washington Editors
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 someone living on a fixed income.
These 15 states impose the lowest taxes on retirees, according to Kiplinger's 2015 analysis of state taxes. All but one of them exempt Social Security benefits entirely from state taxes. Most 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.)
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. Take a look.
By Sandra Block, Senior Associate Editor
| November 2015
Steven Tan via Flickr/Creative Commons
State Income Tax: None
State Sales Tax: None
Estate Tax/Inheritance Tax: No/No
The Last Frontier is a true tax haven for retirees, as well as anyone else who can tolerate long, harsh winters. 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 the lowest in the nation at 12 cents a gallon, compared with a national average of 30 cents.
In addition, the state sends all permanent residents (those who have lived there for at least one year) an annual dividend check from the state's oil wealth savings account. For 2014, the dividend was $1,884 -- or more than $7,500 for a family of four.
The median property tax on the state's median home value of $254,000 is $3,008. That's in the costlier half of U.S. property tax rates overall, but it's not confiscatory. Homeowners 65 and older (or surviving spouses 60 and older) are exempt from municipal taxes on the first $150,000 of assessed value of their property.
Nedra via Flickr/Creative Commons
State Sales Tax: 4%
The Equality State is tax-friendly to all residents, especially retirees. There is no state income tax, and the state sales tax is low. 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., according to the Tax Foundation.
You won't pay high property taxes to own a home on the range. The median property tax on the state's median home value of $195,500 is $1,195, the eighth-lowest in the U.S. Even better for seniors, those who meet income requirements are eligible for a refund of as much as $900 ($800 for single filers) of property, utility and sales/use taxes.
The state's gas tax is 24 cents per gallon, well below the national average of 30 cents per gallon. Wyoming also has the lowest beer tax in the U.S.
Rick Cooper via Flickr/Creative Commons
State Sales Tax: 6.85%
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 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 $165,300 is $1,423.
Food and prescription drugs are exempt from the state's 6.85% sales tax, but counties may tack on as much as 1.3%. The average combined state and local sales tax rate is 7.94%. In addition to sales taxes, vehicle owners are charged an annual "government services tax" that's based on the vehicle's value and age.
Matthew Nichols via Flickr/Creative Commons
State Income Tax: 3% (on income up to $5,000) to 5% (on income of more than $10,000)
State Sales Tax: 7%
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 $97,500 is $778, the 17th-lowest in the nation. The Mississippi 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 the few states that charge 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 a vehicle's 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.
scott e via Flickr/Creative Commons
State Income Tax: 1% (on income up to $750/individual, $1,000/joint) - 6% (on income over $7,000 individual, $10,000/joint)
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 people ages 62 to 64. For those 65 and older, the exemption is $65,000 per taxpayer, or $130,000 per couple. Retirement income includes interest, dividends, net income from rental property, capital gains, royalties, pensions, annuities and the first $4,000 of earned income, such as wages.
The statewide sales tax is 4%, but jurisdictions may add up to 4% of their own taxes. The average combined state and local sales tax rate is 6.96%, according to the Tax Foundation. Food and prescription drugs are exempt.
The median property tax on the state's median home value of $141,600 is $1,352. Full-time residents qualify for a homestead exemption, and seniors may qualify for additional deductions from property taxes.
Jimmy Emerson, DVM via Flickr/Creative Commons
State Income Tax: 2.2% (on income from $2,001 to $5,000) to 6.6% (on income of more than $60,000)
Estate Tax/Inheritance Tax: Yes/No
The First State has no sales tax, and its income tax rates are modest. Social Security benefits are exempt, and seniors can shelter many other forms of retirement income from state income taxes.
Taxpayers 60 and older can exclude $12,500 of income from IRAs, 401(k) plans and pensions from state taxes. For those younger than age 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., according to the Tax Foundation. Median property tax on the median home value of $226,200 is $1,240.
Delaware is the only state on this list with its own estate tax, which mirrors the federal estate tax: In 2015, $5.43 million is exempt. The maximum estate tax rate is 16%. Assets left to a surviving spouse are exempt.
State Income Tax: 2.59% (on income up to $10,000/individual, $20,000/joint) to 4.54% (on income of more than $150,000/individual, $300,000/joint)
State Sales Tax: 5.6%
The Grand Canyon State is a major retirement destination, with plenty of sunshine and a low personal income tax rate.
Social Security benefits are exempt from state tax. Railroad Retirement benefits are also exempt from state taxes, along with as much as $2,500 (total) from military, civil-service, and Arizona state and local government pensions. Individual retirement accounts, 401(k) plans, and other employer-sponsored plans and private pensions are taxed at the regular income tax rate. However, the top rate doesn't kick in until taxable income exceeds $300,000 for married couples, or $150,000 for single filers.
Like most states, Arizona excludes prescription drugs and food for home consumption from its state sales tax. However, counties and municipalities levy their own sales taxes, and some of those taxes apply to groceries. The average combined state and local sales tax rate is 8.17%. The gas tax is 19 cents per gallon, well below the national average of 30 cents.
The median property tax on the state's median home value of $166,000 is $1,321, the 16th-lowest in the U.S.
Pedro fait de la Photo via Flickr/Creative Commons
State Income Tax: 2% (on income up to $12,500/individual, $25,000/joint) to 6% (on taxable income of more than $50,000/individual, $100,000/joint)
The Pelican State offers a bayou full of tax breaks to retirees. Social Security, military, civil-service, and state and local government pensions are exempt from state income taxes.
Residents 65 or older can exclude as much as $6,000 (for joint filers, $12,000 total) of annual retirement income (including IRA distributions and private pension and annuity income) from their taxable income. Railroad Retirement benefits and income from municipal and state police employees' retirement plans are exempt.
The median property tax on the median home value of $140,300 is $714, the third-lowest rate in the U.S.
Although the state sales tax rate is low, local parishes and jurisdictions within those parishes may add their own sales taxes, which can boost the total as high as 11%. The average combined state and local sales tax rate is 8.91%, the fourth-highest in the U.S. Food, drugs, wheelchairs and prosthetic devices are exempt from the state sales tax, but they may be taxed locally.
Jerry Huddleston via Flickr/Creative Commons
The Mount Rushmore State offers a friendly tax environment for retirees. There is no state income tax, so Social Security benefits and all other forms of retirement income get a free ride.
Sales taxes are relatively low, although they cover a broad scope of services. The average combined state and local sales tax rate is 5.83%.
The median property tax on the median home value of $138,400 is $1,828, the 16th-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.
State Sales Tax: 6%
The Sunshine State is very popular with retirees, not just because of its forgiving climate but also because it has no state income tax. Sales taxes, though, can go as high as 7.5%, depending on where you live. The average combined state and local tax rate is 6.65%.
The median property tax on the median home value of $153,300 is $1,623. 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.
SEE ALSO: 10 Worst States for Taxes on Retirees
State Income Tax: 3.07% (flat rate)
Estate Tax/Inheritance Tax: No/Yes
The Keystone State shows its Quaker roots and extends a friendly hand to retirees. It is one of the most generous states in the nation when it comes to excluding retirement income from state taxes.
Social Security benefits, eligible Pennsylvania public and private pension plans, and distributions from 401(k)s, IRAs and other retirement accounts are exempt from state taxes.
Food, clothing, textbooks, heating fuels. and prescription and nonprescription drugs are exempt from sales tax. However, if you wish to buy clothing made of fur or faux fur that is "more than three times the value of the next most valuable component material," don't expect an exemption.
Pennsylvania's property taxes, the 13th-highest in the nation, keep the state from cracking the top 10 on this list. The median property tax on the state's median home value of $164,200 is $2,521, according to the Tax Foundation.
Bill Fitzpatrick via Wikimedia Commons
State Income Tax: 3% (on taxable income of $2,880 - $6,200) to 7% (on taxable income more than $14,400)
The Palmetto State extends its southern hospitality to retirees. Social Security benefits aren't taxed, and seniors age 65 and older can exempt as much as $10,000 in public employee retirement plans, IRA distributions and military retirement benefits from state taxes. Property tax rates are among the lowest in the U.S.
Groceries and prescription drugs are exempt from sales taxes. Seniors 85 and older pay a reduced sales tax rate of 5%.
Median property tax on South Carolina's median home value of $139,200 is $788, according to the Tax Foundation.
J. Stephen Conn via Flickr/Creative Commons
State Income Tax: 2% (on less than $3,000 of taxable income) to 6% (on more than $75,000 of taxable income)
Even if you don't fancy horses and bourbon, you'll find much to love about the Bluegrass State in retirement. Kentucky exempts Social Security benefits from state income taxes, plus up to $41,110 per person of other retirement income, including distributions from IRAs and 401(k) plans, pensions and annuities.
Food, prescription drugs, residential utilities (except telephone) and some medical supplies are exempt from state sales taxes.
The median property tax on Kentucky's median home value of $120,900 is $1,022, according to the Tax Foundation.
Immediate family members, including spouses, parents, children, grandchildren and siblings, are exempt from Kentucky's inheritance tax. Rates for other beneficiaries range from 4% to 16%.
State Income Tax: 4.63% (flat rate)
State Sales Tax: 2.9%
The Centennial State offers great views and generous tax exemptions for retirees.
Residents who are 55 to 64 years old can exclude as much as $20,000 of Social Security benefits, state and local pensions, federal civil-service pensions, military pensions and private pensions from state taxes. Those 65 and older can exclude as much as $24,000.
While the state sales tax rate is low and excludes groceries, local taxes can drive the combined rate as high as 10%. The average combined state and local sales tax rate is 7.4%.
Colorado also has the ninth-lowest property tax rates in the U.S. The median property tax on Colorado's median home value of $240,500 is $1,479, according to the Tax Foundation.
State Income Tax: 0.9% (on up to $4,299 of taxable income) to 7% (on more than $35,100 of taxable income)
State Sales Tax: 6.5%
The Natural State is a low-cost, low-tax retirement destination. It exempts Social Security benefits and as much as $6,000 of retirement income from its state income tax, but that's a lower exemption than more-tax-friendly states for retirees on our list.
Prescription drugs are exempt from state sales taxes, while food is taxed at only 1.5%. However, city and county sales taxes can add up to another 5.5% to the state's relatively high rate of 6.5%; the average local combined sales tax rate is 9.3%.
Another big advantage for Arkansas: Property taxes are among the lowest in the U.S. The median property tax on Arkansas's median home value of $109,500 is $674, according to the Tax Foundation. All households are eligible for a homestead tax credit of up to $350.
9. South Dakota
Kiplinger updates these rankings annually. Above is our 2014 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.
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