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All Contents © 2019The Kiplinger Washington Editors
By Rocky Mengle, Tax Editor
David Muhlbaum, Senior Online Editor
| November 5, 2019
Whether you plan to retire at the beach, near the mountains or to some other dream destination, make sure you check out the local tax situation before packing your bags. If you don't, you might be unpleasantly surprised by hefty state and local taxes in your new hometown.
State and local taxes can vary greatly from one place to another. The difference can easily exceed $10,000 or more per year in many cases, which is enough to break the bank for a lot of retirees. So, to avoid this kind of bombshell, make sure you do some research before settling on a new location. You can start with Kiplinger's State-by-State Guide to Taxes on Retirees, which has been updated for 2019. This tool maps out the tax landscape for each state and the District of Columbia, and allows you to do a side-by-side comparison for up to five states at a time.
We also identified the 10 states that impose the highest taxes on retirees, which are listed below (we saved the worst state for last). Our results are based on the estimated state and local tax burden in each state for a hypothetical retired couple with a mixture of income from Social Security, an IRA, a private pension, interest and dividends, and capital gains. We also gave them a $400,000 home (with a small mortgage) and $10,000 in deductible medical expenses. Take a look to see if your state—or the state you've been dreaming about for retirement—made our "least tax-friendly" list for retirees (we hope it didn't).
See the final slide for a complete description of our ranking methodology and sources of information.
State income tax: 4% (on taxable income of $8,500 or less for single filers; $17,150 or less for joint filers) — 8.82% (on taxable income over $1,077,550 for single filers; over $2,155,350 for joint filers)
Average state and local sales tax: 8.49%
Average property tax: $1,812 per $100,000 in home value
Estate tax/Inheritance tax: Yes/No
Go to New York's full state profile
Unfortunately, the Empire State's heavy tax burden carries over into retirement—especially when it comes to property taxes. Based on New York's state-wide average tax rate, our hypothetical couple would pay about $7,246 each year in property taxes if they owned a $400,000 home in the state (more in certain pricey areas of the state, like New York City or Westchester County). That's the ninth-highest amount in the country. There are some property tax breaks for seniors, though. Local governments and public-school districts can reduce the assessed value of their home by 50%. To qualify, the homeowner must be 65 or older and meet certain income limitations and other requirements. An Enhanced STAR exemption is also available for the primary residences of senior citizens (age 65 and older) with annual household incomes of $86,300 or less for 2019. Under the program, the first $66,800 (for 2019 to 2020 school tax bills) of home value is exempt from school property taxes.
At 8.49%, New York's average combined (state and local) sales tax rate is the 10th-highest in the nation. However, food and drugs are exempt from taxes, as are health club memberships, less-expensive clothing and footwear, most arts and entertainment tickets, and a host of other items.
When it comes to income taxes, New York's tax bite is less severe for retirees when compared to other states. Social Security benefits, federal and New York government pensions, and military retirement pay are exempt. However, anything over $20,000 from a private retirement plan (including pensions, IRAs and 401(k) plans) or out-of-state government plan is taxed.
New York also has an estate tax—with an unusual "cliff tax" kicker. Generally, the tax is only imposed on that portion of an estate over the $5.74 million (for 2019) exemption. However, if the value of the estate is more than 105% of the exemption amount, the exemption won't be available and the entire estate will be subject to New York estate tax. Ouch!
State income tax: 4.95% (flat)
Average state and local sales tax: 8.78%
Average property tax: $2,408 per $100,000 in home value
Estate tax/Inheritance tax: Yes/Yes
Go to Illinois' full state profile
There is some good tax news for retirees in Illinois: Social Security benefits and income from most retirement plans are exempt. Plus, the state's 4.95% flat income tax rate is relatively low.
Now for the bad news: Property taxes hit retirees hard in Illinois. The state-wide average property tax rate in Illinois is the second-highest in the nation—a staggering $9,634 per year on a $400,000 home. Fortunately, there is some relief for seniors in the form of a homestead exemption of up to $5,000 ($8,000 in Cook County), the ability to "freeze" a home's assessed value (must have income of $65,000 or less), and a tax deferral program (up to a maximum of $5,000).
Sales tax rates are high in Illinois, too. The state has the seventh-highest average combined state and local sales tax rate at 8.78%. In some locations, the rate can be as high as 11%!
Illinois also has an estate tax that applies to estates worth $4 million or more. That can be bad news for your heirs.
State income tax: 1.4% (on taxable income of $20,000 or less) — 10.75% (on taxable income over $5 million)
Average state and local sales tax: 6.6%
Average property tax: $2,530 per $100,000 in home value
Estate tax/Inheritance tax: No/Yes
Go to New Jersey's full state profile
Once again, it's the property taxes that crush retirees in the Garden State. New Jersey has the highest average property tax rate in the country. If our make-believe couple owned a $400,000 home in the state, they would pay an eye-popping $10,120 in property taxes each year based on our estimates. New Jersey does offer a program (the "senior freeze") that reimburses eligible seniors for property tax increases. To qualify, you must be at least 65 years old, have lived in New Jersey for at least 10 years and have income below certain limits ($89,013 or less for the 2018 program). A $250 property tax deduction is also available for senior citizens with an annual household income of $10,000 or less.
Income taxes are comparatively low for retirees in New Jersey, thanks in large part to a very generous exemption for retirement income. For example, married seniors filing a joint return can exclude up to $80,000 of income from a pension, annuity, IRA, or other retirement plan if their New Jersey income is $100,000 or less. Single taxpayers and married taxpayers filing a separate return can exclude up to $60,000 and $40,000, respectively. Plus, starting in 2020, the maximum exemption increases to $100,000 for joint filers, $75,000 for single filers, and $50,000 for separate filers. We should also point out that Social Security benefits are not taxed in New Jersey, either.
Sales taxes are reasonable in New Jersey, too. The state sales tax rate is 6.625%, but because some areas charge only half the state rate on certain sales, New Jersey's average state and local combined sales tax rate is only 6.6%.
Although New Jersey recently eliminated its estate tax, the state still imposes an inheritance tax. The tax rates range from 11% to 16% on inherited property with a value of $500 or more. The amount of tax due is based on who specifically receives the property and how much the property is worth.
State income tax: 3.75% (on taxable income of $64,050 or less) — 5.99% (on taxable income over $145,600)
Average state and local sales tax: 7%
Average property tax: $1,723 per $100,000 in home value
Go to Rhode Island's full state profile
Rhode Island's spot on our list of the least tax-friendly states for retirees is primarily based on above-average income and property taxes. On the income tax front, seniors pay tax on their Social Security benefits if their federal adjusted gross income tops $83,550 ($104,450 for joint filers). Higher-income seniors also miss out on a state income tax exemption of up to $15,000 for payouts from private, government, or military retirement plans. To qualify for the exemption, federal AGI can't exceed $81,900 for single filers, $102,400 for joint filers, or $81,925 for married taxpayers filing a separate return (2018 amounts).
The state-wide average property tax rate in Rhode Island is the 11th-highest in the U.S. As a result, the owner of a $400,000 home in the state forks out about $6,892 per year in real property taxes. Homeowners 65 and older who earn $30,000 or less can get a state tax credit, though. Local governments in Rhode Island can also offer a property tax exemption or similar property tax break for senior citizens.
The Rhode Island estate tax is another thing retirees need to worry about. The rate can be as high as 16%, and the tax applies to 2019 estates worth $1,561,719 or more (the threshold is adjusted each year for inflation). That makes Rhode Island one of only three states that tax estates worth less than $2 million.
On the bright side, sales taxes in the Ocean State aren't too bad. There's a 7% state sales tax, but no additional local taxes. That puts Rhode Island in the middle of the pack when it comes to the average combined state and local rate.
National Park Service
State income tax: 3.35% (on taxable income of $39,600 or less for single filers; $66,150 or less for joint filers) – 8.75% (on taxable income over $200,200 for single filers; over $243,750 for joint filers)
Average state and local sales tax: 6.22%
Average property tax: $1,908 per $100,000 in home value
Go to Vermont's full state profile
You'll need plenty of firewood to make it through Vermont winters, and plenty of money for the tax bill in the Green Mountain State. It has a steep top income tax rate, and most retirement income is taxed. The state also taxes all or part of Social Security benefits for single residents with federal adjusted gross income over $45,000 (over $60,000 for married couples filing a joint return).
Local jurisdictions can add 1% to the state sales tax, but the average combined state and local sales tax rate is only 6.22%. That's below the national average. Food for home consumption, clothing, and nonprescription drugs are exempt. But you'll pay a 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.
If our made-up couple owned a $400,000 home in Vermont, they'd pay about $7,634 in property taxes each year, which is the seventh-highest in the U.S. Homeowners age 65 and older may qualify for a tax credit worth 24% of the Federal Elderly and Permanently Disabled Tax Credit if their household income does not exceed a certain level.
Vermont also taxes estates that exceed $2.75 million in value. The tax is imposed at a flat 16% rate.
m01229 via Flickr/Creative Commons
State income tax: 5.35% (on taxable income of $26,520 or less for single filers; $38,770 or less for joint filers) — 9.85% (on taxable income over $161,720 for single filers; over $269,010 for joint filers)
Average local sales tax: 7.43%
Average property tax: $1,224 per $100,000 in home value
Go to Minnesota's full state profile
The North Star State offers cold comfort on the tax front to retirees. Social Security income is taxable to the same extent as it is on your federal return, though taxpayers with taxable Social Security income can deduct up to $5,150 for joint filers, up to $4,020 for single filers, and up to $2,575 for married taxpayers filing a separate return. Pensions are also taxable, unless they're from the military. Distributions from IRAs and 401(k) plans are taxable, too.
There is a special income tax deduction for certain senior citizens. Taxpayers 65 and older can deduct up to $9,600 for single filers or $12,000 for joint filers. However, due to the deduction's phased-out rules, seniors making more than $33,700 (single) or $42,000 (joint) can't claim this tax break.
Food, clothing, prescription and nonprescription drugs are exempt from the state's 6.88% sales tax. A few cities and counties also add a sales tax, which can be as much as 2%. The average combined state and local sales tax rate in Minnesota is 7.43%, which is above the national average.
Property tax rates are slightly above average in Minnesota. For a $400,000 home in the state, the owner would pay about $4,897 per year. The state's Senior Citizen Property Tax Deferral Program allows people age 65 or older, whose household income is $60,000 or less, to defer a portion of the property tax on their home.
For 2019, estates valued at more than $2.7 million are subject to a maximum estate tax rate of 16%. The exemption will rise to $3 million for 2020 and beyond. Assets left to a surviving spouse are exempt.
State income tax: 3.86% (on taxable income of $11,450 or less for single filers; $15,270 or less for joint filers) — 7.65% (on taxable income over $252,150 for single filers; over $336,200 for joint filers)
Average state and local sales tax: 5.44%
Average property tax: $1,924 per $100,000 in home value
Estate tax/Inheritance tax: No/No
Go to Wisconsin's full state profile
The Badger State exempts Social Security benefits from state taxes, but income from pensions and annuities, along with distributions from IRAs and 401(k) plans, are generally taxable. However, 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 filing jointly).
Property taxes are the sixth-highest in the U.S. If our hypothetical couple purchased a $400,000 home in Wisconsin, they would pay about $7,695 per year in property taxes. Plus, there are no special provisions that reduce property taxes for retirees (although tax-deferral loans are available for seniors with incomes under $20,000).
There are some bright spots for retirees. For example, sales taxes are actually low in Wisconsin. It has the eight-lowest combined average state and local tax rate in the nation. There are no estate or inheritance taxes, either.
State income tax: 3.1% (on taxable income of $15,000 or less for single filers; $30,000 or less for joint filers) — 5.7% (on taxable income over $30,000 for single filers; over $60,000 for joint filers)
Average state and local sales tax: 8.67%
Average property tax: $1,491 per $100,000 in home value
Go to Kansas' full state profile
While there's no place like home, maybe Dorothy should think about returning to Oz when she retires to avoid Kansas' high taxes. Distributions from private retirement plans (including IRAs and 401(k) plans) and out-of-state public pensions are fully taxed. Kansas also taxes Social Security benefits received by residents with a federal adjusted gross income of $75,000 or more. Military, federal government and in-state public pensions are exempt from state income taxes, though.
Shopping in Kansas can be expensive, too. The Sunflower State's average combined state and local sales tax rate is the eighth-highest in the U.S. at 8.67%.
Property taxes are above the national average as well. The state-wide average property tax bill for a $400,000 home in Kansas comes to $5,963, which is the 15th-highest amount in the U.S. Homeowners 55 and older who earn $35,000 or less are eligible for a property tax refund of up to $700. A refund of up to 75% of property taxes paid is also available for homeowners 65 or older with household income of $19,800 or less and a home value of $350,000 or less. (Income thresholds are for 2018 refunds.)
The good news is that Kansas does not impose estate or inheritance taxes.
State income tax: 3% (on taxable income of $10,000 or less for single filers; $20,000 or less for joint filers) — 6.99% (on taxable income over $500,000 for single filers; over $1 million for joint filers)
Average state and local sales tax: 6.35%
Average property tax: $2,114 per $100,000 in home value
Go to Connecticut's full state profile
The Constitution State is a tax nightmare for many retirees...but at least things are improving on the income tax front. For residents with federal adjusted gross income over $75,000 ($100,000 for joint filers), 25% of Social Security benefits taxed at the federal level are taxed by Connecticut. (Social Security payments are exempt for taxpayers below those income levels.) Starting in 2019, 14% of income from a pension or annuity is exempt for taxpayers with less than $75,000 of federal AGI (less than $100,000 for joint filers). The exemption percentage is increased 14% each year after 2019 until it reaches 100% for the 2025 tax year. Military pensions are also excluded from state taxes.
Connecticut has the fourth-highest property taxes in the U.S., so the $10,000 cap on the federal tax deduction for state and local taxes stings a bit more here. The state-wide average property tax for a $400,000 home in Connecticut is $8,456 per year. The state offers property tax credits to homeowners who are at least 65 years old and meet income restrictions. Income ceilings are $43,900 for married couples (with a maximum benefit of $1,250) and $36,000 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 (slightly below average). Clothing, footwear and accessories priced at more than $1,000; jewelry worth more than $5,000; and most motor vehicles costing $50,000 or more are taxed at 7.75%.
Connecticut imposes an estate tax on estates valued at $3.6 million or more at progressive rates ranging from 7.2% to 12%. 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 since 2005 and over $3.6 million is taxed. Gift tax rates start at 7.8% and go up to 12%.
State income tax: 2.46% (on taxable income of $3,230 or less for single filers; $6,440 or less for joint filers) — 6.84% (on taxable income over $31,160 for single filers; over $62,320 for joint filers)
Average state and local sales tax: 6.88%
Average property tax: $1,855 per $100,000 in home value
Go to Nebraska's full state profile
Nebraska is the least tax-friendly state in the nation for retirees, primarily because of steep income and property taxes. The Cornhusker State taxes some Social Security benefits and most other retirement income, including IRA withdrawals, 401(k) funds, and public and private pensions. Residents can subtract Social Security income included in federal adjusted gross income if their AGI is $58,000 or less for married couples filing jointly or $43,000 for single residents. However, if their income exceeds the applicable threshold, their Social Security benefits are taxed by Nebraska to the same extent that they're taxed on the federal level. Plus, the top income tax rate kicks in pretty quickly: It applies to taxable income above $31,160 for single filers and $62,320 for married couples filing jointly.
The average property tax rate in Nebraska is pretty high. For a $400,000 home, the state-wide average tax in the state is $7,421 per year. That's the eighth-highest property tax amount in country.
The state sales tax rate is 5.5%, but food and prescription drugs are exempt from the tax. Local jurisdictions can add an additional 2% to the state rate. The average combined state and local combined sales tax rate in Nebraska is 6.88%, which is in the middle of the pack when compared to other states.
Nebraska's inheritance tax ranges from 1% to 18%. The tax on heirs who are immediate relatives is only 1% and does not apply to property that is worth less than $40,000. For remote relatives, the tax rate is 13% and the exemption amount is $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.
Our maps and other tax content include data and state tax-policy details from a wide range of sources. To create our rankings, we created a metric to compare the tax burden in all 50 states and the District of Columbia.
We looked at each state's tax agency, plus this helpful document from the Tax Foundation.
Values for median property tax paid and assessed home value in each state come from the U.S. Census American Community Survey and are 2017 data, the most recent available. We created a ratio of these: average taxes paid per $100,000 of home value.
Each state's tax agency. 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 local governments add sales taxes, this gives an estimate of what most people in the state actually pay, as those rates can vary widely.
Each state's tax agency.
The "tax-friendliness" of a state depends on the sum of income, sales and property tax paid by our sample filers.
To determine income tax, we prepared returns for a married couple with multiple sources of retirement income as described below.
They had a $2,000 mortgage interest deduction, as well as $10,000 in deductible medical expenses (including insurance premiums). For their federal return, our hypothetical couple claimed the standard deduction, but they were able to itemize in some states if that was more advantageous.
Since some states have local income taxes, we domiciled our filers in each state's capital, from Juneau to Cheyenne. We calculated these 2018 returns using software from Credit Karma.
How much the sample filers paid (and deducted, when possible) in property taxes was calculated assuming a residence with $400,000 assessed value and each state's average tax rate.
How much they paid in sales taxes was calculated using the IRS' Sales Tax Calculator, which is localized to zip code. To determine those, we used Zillow to determine zip codes with housing inventory close to our sample assessed value.