Taxes in Retirement: How All 50 States Tax Retirees

If you’re a college football fan, perhaps you’ve thought about retiring to Alabama. But there are also non-football reasons to spend your golden years in the Yellowhammer State—like low taxes for retirees. While most people end up paying the highest income tax rate, it’s not too bad at only 5%. Plus, Social Security benefits and payments from traditional pension plans (i.e., defined benefit plans) are exempt. There’s no tax on income from federal government, certain Alabama state and local government, or military retirement plans, either.

Alabama also boasts the second-lowest property taxes in the the country. Plus, all homeowners age 65 or older are exempt from state property taxes. Seniors with net taxable income of $12,000 or less on their combined (taxpayer and spouse) federal income tax return are exempt from all property taxes on their principal residence.

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The Last Frontier is a tax haven for retirees. Not only do Alaskans pay no state income tax, the state sends all permanent residents (who have lived there for at least one year) an annual dividend check from its oil wealth savings account. The 2019 payout is $1,606. While Alaska taxes real estate, homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed value of their property.

While real estate is taxable in some areas of Alaska, homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed value of their property.

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Sunshine, sunshine, sunshine — and low taxes. The Grand Canyon State exempts Social Security benefits from state income taxes, plus up to $2,500 of income from federal and Arizona government retirement plans. Up to $3,500 of military retirement income is also tax-free in Arizona. While plenty of other states have more generous exemptions, Arizona's low income tax rates keep the net burden down.

Sales taxes are above average in the state—the average combined (state and local) rate is 8.39% (11th-highest in the nation). However, Arizona does not have an estate or inheritance tax, which makes it a more attractive retirement destination for wealthier seniors.

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The Natural State exempts Social Security benefits and up to $6,000 of retirement income from its state income tax. While Arkansas’ property taxes are among the lowest in the nation, its sales taxes—which are levied on food as well—are at the top.

A plus for veterans: All military pension income is tax-exempt.

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California has the highest tax rate in the country, at 13.3% (for millionaires). And while it doesn’t tax Social Security income or Railroad Retirement benefits, all other retirement income is fair game. Sales taxes are high. But, there’s a significant bright spot: If you’re over 65, you get to claim an extra $118 exemption that comes right off your tax bill: It reduces what you owe directly, the same way as a federal tax credit would.

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If you’d like to retire early in the mountains (or at their feet) the Centennial State is a promising place to do it. In Colorado, taxpayers 55 and older get a generous retirement-income exclusion from state taxes, and it gets better when they reach 65. And when it comes to property taxes, seniors may qualify for an exemption of up to 50% of the first $200,000 of property value.

But the Centennial state’s sales taxes (which have a local component) are on the high side, and can reach 11% in some places.

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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.

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%.

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In the First State, Social Security benefits are exempt, and taxpayers over 60 can exclude $12,500 of investment and qualified pension income from state income taxes, and income above that faces only modest tax rates. Homeowners 65 and older may qualify for a credit equal to half of school property taxes, up to $500. The biggest savings of all, though, may be Delaware’s lack of any sales tax whatsovever.

Delaware buried its estate tax at the end of 2017.

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Although the District exempts Social Security income, a steep 8.5% tax rate hits other income over $40,000. (The top income tax rate of 8.95% is reserved for taxable income over $350,000.) But many senior homeowners can get a substantial property tax break. Sales taxes are low.

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The Sunshine State is 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 8.5%, depending on where you live. The average combined state and local tax rate is 7.05%, which is about average.

Property taxes are reasonable in Florida, and residents ages 65 and older who meet certain income, property-value and length-of-ownership restrictions can also receive an extra homestead exemption. Any widow or widower who is a Florida resident may claim an additional $500 exemption as well.

Notably, Florida is one of only two states to exempt cigars from all taxation, a reflection of its long history as a cigar-manufacturing location.

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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 $65,000 of most types of retirement income for those age 65 or older ($130,000 per couple). (For those age 62 to 64, the maximum exemption is $35,000.) 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.

While the state doesn’t tax groceries, localities can.

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The Aloha State is known for its high cost of living, but it can be a tax paradise for retirees. It exempts Social Security benefits as well as most pension income from state income taxes. But if you have other sources of income, Hawaii will tax that income up at rates up to 11%.

The property tax situation is unusual: Tax rates are the lowest in the country, and seniors can also get big-dollar exemptions from property taxes (these vary by county). But keep in mind that Hawaiian property values are sky-high.

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The Gem State taxes all income, except Social Security and Railroad Retirement benefits. Its top tax rate of 6.925% kicks in at a relatively low level. There is a generous retirement-benefits deduction — but only for those with qualifying public pensions. Idaho does not have an inheritance tax or estate tax.

But, sales taxes are low, and since groceries are taxable, the state offers a tax credit of $100 per person to offset these—and raises it to $120 if you’re over 65.

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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.

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While the The Hoosier 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 0.35% (Jefferson County) to 3.38% (Pulaski County).

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Which do you think is higher in Iowa: the corn or taxes? It might be taxes, thanks to above average income and property taxes in the state. One reason why income taxes are on the high end in the state is because over 200 school districts and Appanoose County add their own income taxes on top of the state-level tax. The average property tax rate in the Hawkeye State is the 12th-highest in the nation. For a $400,000 home in the state, the owners can expect to pay about $6,711 per year in property taxes. That certainly doesn’t help homeowners in Iowa.

Income tax rates have been lowered for 2019, and will go down further in 2023, assuming state revenues hold up.

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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, though some breaks are available for seniors.

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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, including public and private pensions and annuities. A modest 6% sales tax is imposed at the state level, and localities can’t add to it. What's not to like? An inheritance tax.

A decedent’s spouse, parents, children, grandchildren and siblings are exempt. But nieces, nephews, daughters-in-law, sons-in-law, aunts, uncles and great-grandchildren are taxed at rates ranging from 4% to 16%, depending on the value of the property inherited (the first $1,000 of property is exempt). All other heirs are taxed at rates ranging from 6% to 16% (their exemption is only for the first $500 of property).

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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. Up to $6,000 per person of pension and annuity income are exempt from income taxes, and any income above that faces fairly low rates. But retirees will still pay some of the country’s highest sales taxes on everything they buy, potentially including groceries, which are taxable in some localities.

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The Pine Tree State, like the majority of states, exempts Social Security benefits from state income taxes. Plus, up to $10,000 per person of eligible pension income can be deducted. Income above that threshold, though, will face stiff income taxes.

Maine is one of a few states that do not allow cities and towns to impose their own local sales tax; only state sales tax of 5.5% is due.

Though Maine does have an estate tax, its exclusion amount is quite high: $5.7 million for 2019.

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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 $30,600 on distributions from 401(k), 403(b) and 457 plans, along with income from public and private pensions.

But here’s the hitch: Any income outside those exclusions will be heavily taxed in the Free State. In addition to the state income tax (which has a top rate of 5.75%), Maryland’s 23 counties and Baltimore City levy additional income taxes ranging from 1.75% to 3.20% of taxable income; per the Tax Foundation, the average rate is 2.9%.

Maryland’s estate tax exemption is $5 million in 2019, plus any predeceased spouse’s unused exclusion amount. ates range from 0.8% to 16%. While Maryland also has an inheritance tax (with a flat 10% rate), the list of heirs exempt from paying it is long.

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The Bay State offers a couple of breaks to retirees. Massachusetts does not tax Social Security and most government employee pension income. But all other income is taxed at a flat rate of 5.1%. Property taxes run high, although there is a refundable tax credit available to eligible homeowners 65 or older.

Massachusetts also has its own estate tax, with an exemption of only $1 million. Tax rates range from 0.8% to 16% (for estates exceeding $10,040,000). There is an unlimited marital deduction for property left to a surviving spouse and an unlimited charitable deduction for property left to a qualified charity.

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In recent years, the Great Lakes State has become less tax-friendly for retirees. As of 2012, for retirees born after 1945, more pension income is subject to state income tax. The state imposes a flat-rate income tax of 4.25%, but cities have income taxes as well (Detroit’s is 2.4%). Some seniors may be able to delay paying property taxes or receive a tax credit — but those property taxes are high.

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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.

The North Star State’s estate tax exemption for 2019 is $2.7 million. It will rise to $3 million in 2020; tax rates are from 13% - 16%. But Minnesota looks back to include as part of your estate any taxable gifts made within three years prior to death.

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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

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 localities add very little, if anything, on top of the state’s rate, and motor vehicle sales are taxed at only 5%.

Property taxes on residential real estate aren’t too bad, at an average of $862 in taxes per $100,000 of assessed home value, which is below the U.S. average. Plus, all seniors are eligible for an exemption on the first $75,000 of taxable value.

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The Show-Me State no longer taxes Social Security benefits for many taxpayers. Taxpayers may also qualify for exemptions on public and private pensions, subject to income limits. But note that if you do have taxable income, the rate gets high quickly: 5.9% of income over $9,253 (for 2018). That rate is coming down, though. For 2019, it’s 5.4%, and it will continue to drop incrementally, to 5.1%, if the state meets revenue targets.

Some seniors may qualify for a property-tax credit.

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The Treasure State is one of five states that do not impose a general state sales tax. That’s the good news. The bad news is that Montana taxes virtually all forms of retirement income, including Social Security. The state allows a pension- and annuity-income exemption of up to $4,110 per person, subject to certain income limitations. Residents 65 and older can exclude up to $800 for single filers (up to $1,600 for married filers) of interest income from state taxes.

On the property-tax front, rates are modest, on average, and any homeowner or renter 62 or older with total household income of less than $45,000 can apply for a refundable income tax credit worth up to $1,000.

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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.

Nebraska’s average property taxes are the eighth-highest in the country. Seniors can get an exemption for up to $40,000 of assessed value, but it’s restricted to single filers earning less than $28,201 and married filers earning less than $33,901.

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The Silver State offers retirees a jackpot of tax savings. There is no state income tax, so you can cash in your retirement plans and collect your Social Security checks without worrying about a big state tax bill. There are no estate or inheritance taxes in Nevada, either.

Property taxes are considerably below the national average. That’s good, as the state offers no property tax breaks for seniors.

Sales tax is one area where Nevada could do better. The state imposes a 6.85% tax, and counties may tack on up to 1.42% more. As a result, the average combined state and local sales tax rate is 8.14% (that’s the 13th-highest combined rate in the country). At least groceries are exempt from sales tax. In addition to sales taxes, vehicle owners are charged an annual “government services tax” that’s based on the vehicle’s value and age.

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Residents of the Granite State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans—because there’s no general income tax. There’s no sales tax, either, so you can shop to your heart’s content.

Here’s the hitch: Median property taxes in New Hampshire are the third-highest in the U.S. Some relief on these is available for seniors, but the programs, run by towns and cities, are complex.

Though New Hampshire imposes a 5% tax on dividends and interest, a $1,200 exemption is available for residents 65 or older.

New Jersey has made efforts to reduce the income tax burden on retirees, with 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.

It's not enough, though, to overcome New Jersey's crushing property taxes—the highest (on average) in the county, with residents paying an average of $2,530 in taxes per $100,000 of assessed home value.

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.

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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. Plus, the sales tax has a broad reach, hitting most services in addition to goods. On the bright side, if you make it 100 years old, income tax is totally waived.

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The Empire State’s heavy tax burden carries over into retirement—especially when it comes to property taxes. 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.

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.

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