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All Contents © 2017The Kiplinger Washington Editors
By Sandra Block, Senior Editor
| November 2017
These 10 states impose the highest taxes on retirees, according to Kiplinger’s 2017 analysis of state taxes. Two of them treat Social Security benefits just like Uncle Sam—taxing up to 85% of your benefits. Five others tax Social Security benefits if your earnings exceed specific income thresholds. Exemptions for other types of retirement income are limited or nonexistent. In several states, property taxes are on the high side, too.
For 2017, we prepared a sample tax return for every state for a hypothetical couple with income from Social Security, a private pension, $5,000 in dividends, and a required minimum withdrawal from an individual retirement account. (See our methodology on the last slide for details.) Our hypothetical couple claims the standard deduction, so tax proposals by Republican lawmakers to eliminate or limit the deduction for state and local taxes and property taxes wouldn’t affect them. If you do itemize, take a hard look at how the loss of those deductions could affect the effective rate you pay, and how much of your income will be exempt.
Our goal is to show how state and local taxes affect retirement income, and our results may surprise you. Because many states allow you to shelter a significant amount of retirement income from taxes, some high-tax states, such as New Jersey and Illinois, are pretty friendly for retirees. Other states with relatively low tax rates take a bigger bite out of retirees’ budgets because most of their income is taxed.
Of course, every household’s situation is different. Take a look to see how you’d fare as a retiree in these states. The worst comes first.
m01229 via Flickr/Creative Commons
The North Star State offers cold comfort on the tax front to 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. Distributions from individual retirement accounts and 401(k) plans are taxable, too.
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 Minnesota's median home value of $186,200 is $2,200, slightly above the average rate for the U.S. Minnesota homeowners of any age whose property taxes are high relative to their incomes may be eligible for a state-paid refund for homeowners.
For 2017, estates valued at more than $2.1 million are subject to a maximum estate tax rate of 16%. The exemption will rise to $2.4 million in 2018, $2.7 million in 2019 and $3 million for 2020 and beyond. Assets left to a surviving spouse are exempt.
SEE ALSO: How Your Income Stacks Up
The Constitution State is a tax nightmare for many retirees.
Social Security benefits are exempt from taxation 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. Military pensions are excluded from state taxes.
The median property tax on Connecticut’s median home value of $270,500 is $5,327, fourth-highest in the nation. Connecticut offers property tax credits to homeowners who are at least 65 years old and meet income restrictions. Income ceilings are $42,200 for married couples (with a maximum benefit of $1,250) and $34,600 for singles (with a maximum benefit of $1,000).
There are no local sales taxes in Connecticut, so you’ll pay only the statewide rate of 6.35% on your purchases. Clothing, footwear and accessories priced at more than $1,000 and luxury items (such as jewelry) worth more than $5,000 are taxed at 7.75%.
Connecticut imposes an estate tax on the transfer of 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 also 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. Only the amount given after January 1, 2005, and over $2 million is taxed, starting at 7.2% of the excess and rising to $748,200 plus 12% of the excess over $10.1 million.
SEE ALSO: Taxes on Social Security Can Be a Costly Retirement Surprise
Faced with a ballooning budget deficit, lawmakers in Kansas boosted taxes this year, making the state even less friendly for retirees. Distributions from individual retirement accounts, 401(k) plans and out-of-state pensions are fully taxed. Kansas excludes Social Security benefits from state income taxes for residents with a federal adjusted gross income of $75,000 or less, but those with a higher AGI will pay taxes on those benefits, too. Military, civil-service and in-state public pensions are exempt from state income taxes.
The state’s combined state and local sales tax rate is the eighth-highest in the U.S. Property taxes are above average for the U.S., too. The median property tax on Kansas’ median home value of $132,000 is $1,849.
Homeowners 55 and older who earn $34,100 or less are eligible for a refund of up to $700 under the Homestead Property Tax Refund Act. (Note: 50% of Social Security benefits can be excluded from income for the purposes of qualifying for this program.)
National Park Service
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 up to 85% of benefits could be taxed.
Vermont limits deductions to $15,000 for single residents and $31,500 for married couples. If your income is $1 million, that would cost you about $5,000 in additional state taxes.
Local jurisdictions can add 1% to the state sales tax. The average combined state and local sales tax rate is 6.17%. 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 $217,500 is $3,795, the ninth highest in the U.S. 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.
Vermont taxes estates that exceed $2.75 million. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.
The Cornhusker State taxes some Social Security benefits and 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 $29,830 for single filers and $59,660 for married couples filing jointly.
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 6.87%.
The median property tax on the state's median home value of $133,200 is $2,467, the seventh-highest in the U.S.
Nebraska's inheritance tax is a local tax administered by counties and ranges from 1% to 18%. Assets left to a spouse or charity are exempt.
The Land of Enchantment is not a magical place for well-off retirees. Social Security benefits, retirement accounts and pensions are all taxable. The state does offer a retirement-income exemption of up to $8,000, but you must meet certain income restrictions to qualify.
Residents 65 and older qualify for the exemption if they are single and have adjusted gross income under $28,500; married filers who file jointly qualify for the exemption if their income is less than $51,000.
New Mexico’s sales tax is a gross receipts tax that covers most services.
On the plus side, property taxes are well below average for the U.S. The median property tax on New Mexico's median home value of $160,300 is $1,188.
Homeowners 65 and older who earn $16,000 or less are eligible for a property tax credit of up to $250 (married filing jointly) or $125 (single taxpayers). Also, low-income homeowners 65 or older can apply to have the tax valuation of their property frozen. Residents of Los Alamos and Santa Fe counties who earn $24,000 or less may also qualify for a low-income property tax rebate.
Oh, and if you make it to 100 years old, income tax is completely waived.
Moritz Zimmermann, CC BY-SA 3.0
The Beehive State, which moved to a 5% flat income tax system in 2008, taxes Social Security benefits, as well as distributions from retirement savings plans and income from public and private pensions. The state offers a retirement-income tax credit for seniors who meet certain income limits.
The state sales tax is 5.95%, including a 1.25% tax that goes to local governments. Localities can add up to an additional 2.1% as well; the average combined rate is 6.69%. Food is taxed at 3%.
Residents 65 and older may be able to claim a retirement-income tax credit of up to $450 per person ($900 per married couple), subject to income-eligibility limits. The credit is phased out at 2.5 cents per dollar of modified AGI over $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for married people filing jointly. The credit can be used to offset taxes on Social Security benefits and distributions from individual retirement accounts and public and private pensions. Distributions from 401(k) plans are fully taxable.
Taxpayers younger than 65 can claim a nonrefundable tax credit of up to 6% of eligible retirement income or $288, whichever is less.
Property taxes are well below average. The median property tax on Utah's median home value of $215,900 is $1,472.
The Free State can be pricey for many retirees. Maryland’s combined state and local income taxes are high, and distributions from individual retirement accounts are fully taxable. In addition to the state income tax, Maryland's 23 counties and Baltimore City may levy additional income taxes ranging from 1.75% to 3.20% of taxable income. The average levy is 2.9%, according to the Tax Foundation.
Maryland doesn’t tax Social Security benefits. If you are 65 or older or totally disabled (or your spouse is totally disabled), you qualify for an exclusion of up to $29,400 on distributions from 401(k), 403(b) and 457 plans, along with income from public and private pensions.
The median property tax on Maryland's median home value of $288,500 is $3,154.
Maryland is the only state that has an estate and an inheritance tax. Property passing to a spouse, child or other lineal descendant, spouse of a child or other lineal descendant, parent, grandparent or sibling is exempt from taxation. Property passing to other individuals is subject to a 10% tax.
Maryland’s estate tax is imposed on estates exceeding $3 million in 2017. The threshold will rise to $4 million in 2018. In 2019 and beyond, Maryland will adopt the federal threshold, which is currently $5.46 million. The maximum tax rate is 16%.
The Hoosier State promotes itself as a low-tax haven, but some retirees may beg to differ. While the state exempts Social Security benefits and offers limited exemptions for military pensions and federal civil-service pensions, IRAs, 401(k) plans and private pensions are fully taxable.
Keep in mind, too, that counties have the authority to levy their own income taxes on top of the state’s flat tax. Rates range from 0.2% (Vermillion County) to 3.38% (Pulaski County).
The state sales tax rate is 7%, and there are no local taxes.
Taxpayers 60 and older may exclude as much as $2,000 from military pensions. Taxpayers age 62 and older may deduct from their adjusted gross income up to $2,000 from a federal civil-service annuity (minus Social Security and Railroad retirement benefits received). Out-of-state pensions are fully taxed.
The median property tax on the state's median home value of $124,200 is $1,085, below average for the U.S. Homeowners can deduct up to $2,500 from their income taxes for property taxes paid on their residence.
Homeowners 65 and older who earn $25,000 or less (combined for a married couple) are eligible to receive a tax reduction on property with an assessed value of $182,430 or less. A surviving spouse is entitled to the deduction if he or she is at least 60 years old and the deceased was at least 65 at the time of death. The amount of the deduction is the lesser of one-half of the assessed value of the property or $12,480. Veterans 62 or older with a disability of at least 10% may qualify for a similar deduction.
The Badger State exempts Social Security benefits from state taxes, but income from pensions and annuities, along with distributions from your IRAs and 401(k) plans are taxable. The state offers some retirement income exemptions, subject to income limits.
Property taxes are the fifth-highest in the U.S. The median property tax on Wisconsin’s median home value of $165,800 is $3,428.
Retirees who are 65 and older can subtract up to $5,000 of retirement income, including distributions from IRAs, from Wisconsin taxable income if their federal adjusted gross income is less than $15,000; $30,000 for a married couple who files a joint return.
To create our rankings, we evaluated data and state tax-policy details from a wide range of sources.
We looked at each state's tax agency, plus this helpful document from the Tax Foundation. To better capture the effect of retirement tax breaks, we prepared tax returns in each state for a hypothetical couple with this profile:
This allowed us to see what income was sheltered from tax, as well as what the final tax bill was. Some states that make minimal concessions to retirees end up being tax-favorable destinations anyway, as their rates are low. In other cases, tax breaks for retirees ended up lowering taxable income substantially, so that some traditionally "high tax" states only took a modest bite.
Median income tax paid and median home values come from U.S. Census' American Community Survey and are 2015 data.
We also cite the Tax Foundation's figure for average sales tax, which is a population-weighted average of local sales taxes. In states that let municipalities add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.
Each state's tax agency.
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