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All Contents © 2019The Kiplinger Washington Editors
By Sandra Block, Senior Editor
David Muhlbaum, Senior Online Editor
Rocky Mengle, Tax Editor
| November 29, 2018
These 10 states impose the lowest taxes on retirees, according to Kiplinger’s 2018 analysis of state taxes. All of them exempt Social Security benefits from state taxes. Most exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. Most also have low property taxes. That’s important because the Tax Cuts and Jobs Act limits the amount you can deduct in state and local taxes on your federal return to $10,000 a year.
Take a look at the most tax-friendly states for retirees. We list the best last.
State income tax: 1% (on the first $750 of taxable net income for single filers/$1,000 for joint filers) — 6% (on taxable income over $7,000 for single filers/$10,000 for joint filers)
Average state and local sales tax: 7.23%
Estate tax/Inheritance tax: No/No
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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 up to $35,000 of most types of retirement income for those age 62 to 64. (For those 65 and older, the exemption is $65,000 per taxpayer, or $130,000 per couple.) Retirement income includes pensions and annuities, interest, dividends, net income from rental property, capital gains, royalties, and the first $4,000 of earned income, such as wages. Plus, income taxes will be falling a bit: The top rate will fall to 5.75% in 2019 and 5.5% in 2020, if the governor and legislature reconfirm the reduction in that year's legislative session.
One caveat: Georgia is one of a handful of states that doesn’t provide special treatment for military pensions. The state’s retirement-income exemption may not cover all of your military pension, and if you also have retirement savings from a private-sector job, you could end up paying taxes on that, too.
The statewide sales tax is 4%, but jurisdictions can add up to 4.9% of their own taxes. The average combined state and local sales tax rate is 7.23%. While the state doesn’t tax groceries, localities can.
The median property tax on the state’s median home value of $152,400 is $1,413. Georgia offers a number of programs to reduce the property tax burden on seniors; some start at age 62, and some at age 65.
State income tax: Kentucky has a flat tax rate of 5%. Local income taxes are additional.
Average state and local sales tax: 6%
Estate tax/Inheritance tax: Yes/No
The Bluegrass State exempts Social Security benefits from state income taxes, plus up to $31,110 per person of a wide variety of retirement income.
Kentucky’s retirement-income exclusion includes distributions from IRAs and 401(k)s as well as private pensions and annuities. There is an additional exclusion for qualified military, civil-service, and state and local government pensions.
Kentucky has a homestead exemption on the assessed value of a qualifying single-unit residential property, which is adjusted every two years according to the cost-of-living index. The median property tax on Kentucky's median home value of $126,100 is $1,078, about average for the U.S.
For homeowners 65 and older or totally disabled, $37,600 of the assessed value of their property is exempt from state taxes under the homestead provision for 2017-18.
Kentucky has an inheritance tax, but all Class A beneficiaries (spouse, parent, child, grandchild, brother and sister) are exempt. Other beneficiaries are subject to inheritance tax rates ranging from 4% to 16%.
State income tax: None
Average state and local sales tax: None
Residents of the Granite State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans. There’s no sales tax, either, so you can shop to your heart’s content.
New Hampshire imposes a 5% tax on dividend interest; a $1,200 exemption is available for residents 65 or older. It also depends more on property taxes for revenue than most states. Be advised, though, that some high-income homeowners could pay more federal tax due to the new $10,000 cap on deductions for state and local taxes. The median property tax on New Hampshire’s median home value of $239,700 is $5,241, the third-highest in the U.S.
An exemption for property taxes is available to those age 65 and older who have lived in New Hampshire for at least five years. Towns and cities set additional eligibility rules, but the minimum exemption is $5,000 off the assessed home value.
National Park Service
Average state and local sales tax: 8.14%
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.
Groceries are exempt from the state’s 6.85% sales tax. Counties may tack on up to 1.42%, and the average combined state and local sales tax rate is 8.14%. In addition to sales taxes, vehicle owners are charged an annual “government services tax” that’s based on the vehicle’s value and age.
The median property tax on the state’s median home value of $191,600 is $1,478. The state offers no property tax breaks for seniors.
State income tax: 3.07%
Average state and local sales tax: 6.34%
Estate tax/Inheritance tax: No/Yes
Pennsylvania’s state tax rate is irrelevant to most retirees, because the state exempts most retirement income from state taxes. Social Security benefits, public and private pensions, and distributions from IRAs and 401(k) plans are tax-free. The Keystone State’s often-high local income taxes are only applied to earned income, so they’re also not a concern for retirees who have fully removed themselves from the workforce.
Clothing and nonprescription drugs are exempt from sales taxes.
However, itemizers take note: The new federal $10,000 cap on local tax deductions could sting, particularly in some high-cost parts of the state. The median property tax on the median home value of $167,700 is $2,603, 13th-highest in the U.S.
Pennsylvania’s inheritance tax is calculated as a percentage of the value of the estate transferred to beneficiaries. The amount is determined based on the relationship of the heir to the decedent and the decedent's date of death. The tax rate is 4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings and 15% for transfers to other heirs (except charitable organizations, exempt institutions and government entities). Property a husband and wife own jointly is exempt from the tax, and so is property inherited from a spouse or from a child 21 or younger by a parent. If the inheritance tax is paid within three months of the decedent's death, a 5% discount may apply. There is no state estate tax.
Average state and local sales tax: 6.80%
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 8.0%, depending on where you live. The average combined state and local tax rate is 6.80%.
Florida residents ages 65 and older who meet certain income limits can receive an extra homestead exemption of up to $50,000 from some city and county governments and/or an exemption equal to the assessed value of the property, as long as the real estate has a fair market value of less than $250,000, the homeowner has maintained permanent residence at the location for at least 25 years, and household income does not exceed $29,454 in 2018. Any widow or widower who is a Florida resident may claim an additional $500 exemption. The median property tax on the median home value of $166,800 is $1,702.
Loco Steve via Flickr/Creative Commons
State income tax: 3% (on taxable income of $1,000 or more) — 5% (on more than $10,000 of taxable income)
Average state and local sales tax: 7.07%
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 tax, it also excludes withdrawals from IRAs and 401(k) plans, income from public and private pensions, and other types of qualified retirement income. The state is also exempting more income from tax each year. Starting in 2019, the first $1,000 of taxable income is exempt from the 3% rate. By 2022, the first $5,000 of taxable income will be exempt.
Mississippi’s state sales tax rate of 7% is the second-highest in the U.S. (only California, at 7.25%, is higher), and Mississippi is one of a minority of states that charges sales tax on groceries. But residential utilities, motor fuel and newspapers are all exempt, and localities add very little, if anything, on top of the state’s rate.
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 vehicles’ age and value. The median property tax on the median home value of $105,700 is $841, well below average for the U.S.
Average state and local sales tax: 6.40%
The Mount Rushmore State offers a friendly tax environment for retirees. There is no state income tax, so Social Security benefits and other forms of retirement income get a free ride.
Sales taxes are relatively low, with an average combined state and local sales tax rate of 6.40%. However, very little is exempt from this levy: Groceries, nonprescription drugs and many services are taxed. You can expect to start paying sales taxes on more of your online purchases, too. South Dakota brought the case that led the Supreme Court to overturn previous court rulings that made it difficult for states to collect sales taxes for online purchases. South Dakota started collecting sales taxes from many out-of-state online retailers on November 1.
The median property tax on the median home value of $146,700 is $1,943, the 16th-highest rate in the U.S.
Average state and local sales tax: 5.39%
The Equality State is tax-friendly to all residents, especially retirees. There is no income tax, and sales taxes are 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, either. The median property tax on the state’s median home value of $199,900 is $1,223, the ninth-lowest in the U.S. Even better for seniors, those who meet income requirements are eligible for a refund of up to $900 ($800 for single filers) of property taxes, utilities and sales/use taxes.
Average state and local sales tax: 1.43%
Alaska is a true tax haven for retirees (or anyone else who doesn’t mind discovering a moose on their front porch). 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.
In addition, the state sends all permanent residents (who have lived there for at least one year) an annual dividend check from the state’s oil wealth savings account. However, declining oil revenues have reduced this windfall: This year, each legal resident received $1,600, down from a peak of $2,072 in 2015.
The median property tax on the median home value of $257,100 is $3,048. That’s in the costlier half of U.S. property tax rates overall but 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.
To create our rankings, we evaluated data and state tax-policy details from a wide range of sources. These include:
We looked at each state’s tax agency, plus this helpful document from the Tax Foundation. Rates and brackets are for the 2018 tax year unless otherwise noted.
Median income tax paid and median home values come from the U.S. Census American Community Survey and are 2016 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.