States are all over the map when it comes to taxing retirement income. By Rachel L. Sheedy, Editor From Kiplinger's Retirement Report, October 2014 Tax planning is a cornerstone of retirement planning. But by focusing on Uncle Sam, many retirees overlook the state-tax bite. States vary across the map on how they tax everything from retirement income to retail purchases. If you're thinking of relocating, be sure to know how potential retirement destinations compare with your current state when it comes to taxes.See Also: Retiree Tax Map Here we look at three primary categories: state tax treatment of pensions and retirement income, Social Security, and estates and inheritances. Other categories to consider are sales taxes and property taxes. You can get more information on all of these taxes by going online to Kiplinger's updated Retiree Tax Map. You can click on a state to see its full tax profile. You also can sort the map based on certain categories, such as those states that have no income tax. By using the "compare" feature, you can select up to five states to see how they stack up to each other side by side. Pensions and Retirement Income Retirement income of all kinds gets a pass in seven states. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no state income tax. Advertisement Two states, New Hampshire and Tennessee, tax only dividends and interest, and both offer breaks to seniors. New Hampshire offers a $1,200 exemption for taxpayers 65 and older. Tennessee exempts taxpayers over 65 who have total annual income of up to $33,000 for single filers ($59,000 for joint filers) from the tax on dividends and interest. Of the 41 states, plus the District of Columbia, that have an income tax, eight have a flat tax, which imposes a single rate on all residents regardless of income. North Carolina is the newest convert to the flat tax, which kicks in this year; the state's flat income tax rate is 5.8% for 2014 and drops to 5.75% for 2015 and beyond. The other 33 states, plus the District, impose graduated tax rates, which tax households with higher incomes at a higher rate. Most states offer some type of retirement-income exclusion, though some are more generous than others. Mississippi, for instance, exempts all retirement income, including public and private pensions and distributions from retirement accounts, such as IRAs and 401(k)s. Other states exclude a set amount of retirement income from taxation. These amounts vary greatly, from a few hundred bucks to thousands of dollars. Georgia offers the largest retirement-income exclusion, at $65,000 for a taxpayer 65 or older (couples can exclude $130,000). Georgians who are ages 62 to 64 can exclude up to $35,000 per taxpayer. Advertisement Pay close attention to the formula for the exclusion, which differs by state, too. Maine, which has increased its exclusion by $4,000, lets seniors exclude up to $10,000 of retirement income starting in 2014. The exclusion can be applied to pension income, annuity income and IRA distributions, but a taxpayer must first subtract Social Security benefits from the $10,000 deduction. Some states offer tax breaks on certain categories of retirement income. Kansas, for example, exempts in-state public pensions but taxes all private retirement income. Alabama excludes private pensions but taxes distributions from defined-contribution plans, such as 401(k)s. Then there are those states that offer no safe haven for retirement income. This year North Carolina joins five other states that offer no breaks: California, Minnesota, North Dakota, Rhode Island and Vermont. (An extra hit: California imposes a 2.5% penalty for those who withdraw from a retirement plan before age 59 1/2—in addition to the 10% federal penalty.) Two states offer no general breaks on retirement income but do offer a break to military retirees. Connecticut excludes 50% of military retirement pay from tax. Starting in 2015, Nebraska will let military retirees choose to either exclude 40% of military retirement income for seven consecutive taxable years or to exclude 15% of that income for all taxable years starting the year they turn age 67. Advertisement Social Security Benefits While the federal government taxes up to 85% of Social Security benefits, the majority of states exclude Social Security from state income tax. Iowa is the newest member of that group—as of 2014, Iowa has completely phased out its state tax on Social Security benefits. In addition to the nine states that don't have a broad-based income tax, Social Security benefits are free from state income taxes in Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin. The District of Columbia also waives income tax on Social Security. Of the remaining 13 states, Social Security benefits are taxable to some extent. Rhode Island and West Virginia, for instance, tax benefits the same as the federal government does. Connecticut, Kansas and Missouri tax benefits when a taxpayer's income exceeds certain thresholds that are higher than the federal threshold. As of 2015, Nebraska, which now taxes benefits the way Uncle Sam does, joins this group. Starting next year, Nebraskans whose adjusted gross income is $58,000 or less if married filing jointly, or $43,000 or less for all other filers, will avoid having to pay state income tax on Social Security. Some of these states allow benefits to qualify for a tax break under its retirement-income exclusion. New Mexico, for example, lets a retiree protect otherwise taxable benefits under its $8,000 exclusion. Advertisement Estate and Inheritance Taxes The majority of states do not impose estate tax or inheritance tax. But 17 states and the District of Columbia have one or the other, and two states—Maryland and New Jersey—impose both levies. An estate tax hits the estate before assets are distributed, while an inheritance tax is paid by the heirs. Tennessee, which calls its tax an inheritance tax, imposes a tax on estates of more than $2 million in 2014; the exemption rises to $5 million in 2015, and the tax is eliminated in 2016. Generally, state estate-tax rates are graduated up to 16% on the largest estates. That compares with the 40% federal estate-tax rate. But estate-tax exemptions in some states are lower than the federal estate-tax exemption, which for 2014 is $5.34 million. In Minnesota, for instance, estates larger than $1.2 million are subject to state estate tax in 2014, gradually rising to $2 million by 2018. In New Jersey, the exemption is $675,000. In both cases, an estate that could be exempt from federal estate taxes could end up with a state tax tab. A couple of states are gradually closing that gap starting this year and next. New York, whose estate-tax exemption had been $1 million, raised it to $2,062,500 as of April 1, 2014, and will gradually raise it until January 2019, when it's set to match the federal exemption in effect that year. Beginning in 2015, Maryland will raise its current $1 million exemption to $1.5 million. Its exemption will also gradually rise to eventually match the federal exemption by 2019. The gift tax remains standing in only one state: Connecticut. Its gift tax kicks in after a $2 million lifetime exclusion. After implementing a gift tax last summer, Minnesota repealed it this year and retroactively for last year.