Don't Miss These Valuable State Retirement Tax Breaks in 2025

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Retirement often evokes images of leisure, but sadly, we must also consider tax planning. And while federal taxes usually dominate the conversation, state taxes, which can significantly impact retirees on fixed incomes, often fly under the radar.

(That's particularly true now, with all the talk of tariffs and 2025 federal tax reform (also known as President Trump's "one big beautiful bill.")

So, we're exploring some state tax incentives to help you maximize your retirement savings.

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Whether you're enjoying retirement or still planning, this information can hopefully guide you to a great retirement destination in the United States.

States with no income tax

Nine states don’t tax individual income (including retirement income), making them attractive for retirees looking to reduce their tax burden.

A retiree with a $50,000 annual income could save $2,000 to $5,000 yearly in a no-income-tax state compared to a state with an average income tax rate.

As of 2025, these states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

A couple of things to note: As of 2025, New Hampshire fully phased out its tax on interest and dividends. Also, while Washington state doesn’t tax most earned income, it has a long-term capital gains tax — 7% on assets sold for a profit exceeding $270,000 as of 2024.

State retirement income incentives

Some states offer targeted retiree tax relief, even if they tax other forms of income. That can be helpful for retirees working part-time or with income sources beyond retirement accounts.

For instance, Pennsylvania doesn’t tax retirement income and offers a flat tax rate of 3.07% on other income sources. That can provide a more predictable tax environment for those who supplement their retirement income.

Illinois fully exempts distributions from pensions, 401(k)s, IRAs, and Social Security.

In Iowa, residents 55 and older pay no state income tax on retirement income. Mississippi exempts retirement plans and pensions. However, early withdrawals are taxable.

Grocery and sales tax relief

Even in tax-friendly states, sales taxes, especially on groceries, can add up. Consider these sales tax breaks:

Alaska: No state sales tax (local taxes may apply).
Delaware, Montana, New Hampshire, and Oregon also don’t have state sales tax
Florida and Texas: Exempt most grocery items from statewide sales tax
Nevada: Unprepared grocery items are exempt from state sales tax
Plenty of other states have long-exempted groceries from tax

While not income-tax-free states, Oklahoma and Kansas recently eliminated state sales taxes on groceries. Illinois is set to eliminate its 1% grocery tax in January 2026.

This matters: Data show that in 2023, retirees spent an average of $4,497 annually on groceries consumed at home.

In 2025, a household's average monthly grocery bill is about $500. So, a family spending that much on groceries in Florida could save $30–$60/month compared to a state that taxes groceries at 4%. Over a decade, that's up to $7,200 in savings.

Property taxes and homestead exemptions

High property tax can significantly offset income and sales tax savings. However, several states offer homestead exemptions, particularly for older adults and retirees. Here are a few to consider.

Alaska: Up to $150,000 off home value for those 65 or older who meet specific requirements
Florida: Up to $50,000 (combined exemptions for eligible taxpayer properties)
Texas: Up to $150,000 for older adults (pending a 2025 vote)

New Jersey, Maryland, and Washington, D.C., offer property tax relief programs for older adults in 2025, with New Jersey introducing a combined application for multiple programs, including “Stay NJ.”

For more information, see "What's Going on With NJ Property Tax Relief Programs?

Maryland's Howard County provides an Aging-in-Place Tax Credit, and Washington, D.C., offers a 50% property tax reduction for eligible individuals over 65.

rendering of a piggy bank next to a stack of coins and model house

Estate and inheritance taxes

As you plan for the future, preserving wealth for heirs becomes a primary concern.

As of 2025, 38 states have eliminated estate or inheritance taxes. The absence of these taxes can lead to significant savings for your loved ones, depending on the size of your estate.

A few:

Florida and Texas: Combine no income tax with no inheritance or estate taxes
Arizona: Has a low flat income tax rate of 2.5% and no estate or inheritance tax

Veteran tax benefits?

Approximately 18 million Veterans reportedly reside in the U.S.(though it’s hard to say how many are retirees), and various states offer Veteran-focused tax breaks.

Maryland allows Veterans over age 55 to exempt up to $20,000 in retirement income from tax, regardless of disability status. Illinois exempts military retirement pay, Survivor Benefit Plan payments, and other military benefits from state tax for all its veterans.

Virginia has a growing deduction for military retirees, allowing them, as of 2025, to exclude up to $40,000 of their retirement pay from state taxes.

Additionally, as of 2025, most states fully exempt military retirement pay from state income tax.

Other retiree tax breaks

clear piggy bank with various coins inside

Some states offer other targeted tax breaks that can be particularly appealing to retirees.

Georgia allows residents 62 and older to exclude up to $35,000 of their retirement income from state taxes, increasing to $65,000 for those 65 and older.
Colorado now allows residents between 55 and 64 to avoid paying taxes on Social Security benefits if their adjusted gross income (AGI) stays under $75,000 for single filers or $95,000 for joint filers.
Meanwhile, West Virginia is set to eliminate its taxes on Social Security benefits by 2026, becoming more tax-friendly for retirees.

For more information, see: New Social Security Tax Reforms Change Benefits in Two States.

Some states also offer tax breaks for long-term care insurance premiums and medical expenses.

For example, Montana provides a tax credit for long-term care premiums paid for a qualifying family member. The maximum account is up to $5,000 per family member in a tax year or $10,000 for two or more family members.

New York provides a 20% tax credit for qualifying long-term care insurance premiums, up to $1,500, for state-approved policies.

Where to retire: Tradeoffs and future considerations

Don't forget to look at the complete picture when considering a retirement state for tax savings.

For example, Washington and Texas have no income tax but higher property taxes. Nevada and Florida offer no income tax but relatively higher sales taxes. Alaska offers several tax breaks but a relatively high cost of living, particularly in remote areas.

Plus, some states with income tax may have a lower overall tax burden for particular residents. A study by the Institute on Taxation and Economic Policy found that families in California earning below $145,900 faced an overall tax burden close to the national average, which is surprising considering California's high-tax reputation.

Also, as we move through 2025, many states are reducing tax rates, which can lower one's tax burden and free up income for other retirement pursuits.

Nebraska lowered its top individual income tax rate from 5.84% to 5.2%, North Carolina reduced its flat personal income tax rate from 4.5% to 4.25%, and West Virginia decreased its top tax rate from 5.12% to 4.82%.

Retirement Taxes

Finding balance

By focusing on states that align with your income sources and spending habits, you can help safeguard your nest egg and enjoy retirement on your terms. Remember that tax laws can change, so stay informed about updates in your state.

And while considering tax savings can help you make a well-informed decision for a fulfilling and secure retirement, ultimately, the ideal retirement destination balances financial benefits with quality of life.

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

More on Retirement Taxes

Kelley R. Taylor is the senior tax editor at Kiplinger.com, where she breaks down federal and state tax rules and news to help readers navigate their finances with confidence. A corporate attorney and business journalist with more than 20 years of experience, Kelley has helped taxpayers make sense of shifting U.S. tax law and policy from the Affordable Care Act (ACA) and the Tax Cuts and Jobs Act (TCJA), to SECURE 2.0, the Inflation Reduction Act, and most recently, the 2025 “Big, Beautiful Bill.” She has covered issues ranging from partnerships, carried interest, compensation and benefits, and tax‑exempt organizations to RMDs, capital gains taxes, and energy tax credits. Her award‑winning work has been featured in numerous national and specialty publications.