Best States to Retire for Taxes: Tax Rates by State

Lowest tax states for retirees

You don’t have to plan a big move, but it does pay to know your options.

Looking for a great place to retire, or wondering if the state where you live will make life a bit easier? Ten states in particular strive to make life less expensive on retirees by lightening the tax burden. Of those, we’ve selected the top 5 to show how they stack up.

None of these states tax Social Security benefits, according to AARP. And combined with other tax benefits, any of them would be a smart place to call home.

Low Tax State #1: Wyoming

Wyoming tops the list of friendliest tax states for retirees. In fact, it’s one of the lowest tax states for residents of any age. Prescriptions are tax-free, and so are groceries. And if you own your own home, only 9.5 percent of the assessed value is subject to tax.

Kiplinger explains that oil and mineral company revenues are what allow Wyoming to relieve the tax burden that residents of other states often carry. When it comes to all-around benefits, the “Equality State” is hard to beat.

  • State Income Tax: Zero
  • State Sales Tax: 4 percent
  • Estate Tax: No
  • Inheritance Tax: No
Lowest tax states for retirees

Mississippi offers multiple tax exemptions that help you keep more of your income.

 

Other Tax Free States — States without Income Tax

Wyoming is the only tax free state (state income tax) to make the list of the lowest tax states for retirees.  That is because other tax free states make up for the tax shortfall with particularly high property taxes, sales taxes or other taxes.

However, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming are also state income tax free.  While Tennessee and New Hampshire only tax dividend and interest income.

Low Tax State #2: Mississippi

Mississippi is an especially good state for retirees. Many of the tax benefits are aimed at helping you keep more of your retirement income, and prescription drugs and health care are tax exempt.

Social Security is also exempt from state tax, and so are your pension, annuities, IRA, and 401(K) distributions. And while your home is taxed at 10 percent of its assessed value, retirees can qualify for the Homestead Exemption, which means the first $75,000 of its value is tax exempt.

  • State Income Tax: 3 – 5 percent
  • State Sales Tax: 7 percent
  • Estate Tax: No
  • Inheritance Tax: No

Low Tax State #3: Pennsylvania

Coming in next on Kiplinger’s list of retiree tax-friendly states is Pennsylvania, which offers some great benefits. There’s no Social Security tax. And your pension, 401(K), IRA, and other tax-deferred retirement accounts are exempt.

The necessities of life are also tax free, including food, clothing, and medications. But property taxes may be high in urban areas, and estate and inheritance taxes can pinch your heirs if the estate is worth at least $5 million.

  • State Income Tax: 3.07 percent
  • State Sales Tax: 6 percent
  • Estate Tax: Yes
  • Inheritance Tax: Yes

Low Tax State #4: Kentucky

Kentucky is another state where retirees find a life that’s less burdened by taxes. Social Security isn’t taxed, and your retirement income from pensions, annuities, and other sources, up to $41,110 is also exempt. That’s per person, not per household.

If you’re over 65, you’ll automatically qualify for a Homestead Exemption on part of your home’s value. And while there is an inheritance tax in Kentucky, everyone in your immediate family is exempt from the duty.

  • State Income Tax: 2 – 6 percent
  • State Sales Tax: 6 percent
  • Estate Tax: No
  • Inheritance Tax: Yes
Lowest tax rates for retirees

Alabama’s tax exemptions for retirees might be more exciting than a Talladega race day.

Low Tax State #5: Alabama

Rounding out the top 5 tax-friendly states for retirees is Alabama. If you have any type of pension at all, chances are it’s exempt. Specific examples include public and private pensions, and military pensions. Other income is subject to rates between 2 and 5 percent.

Property taxes are another area where retirees are fortunate. Everyone over the age of 65 is except from state property tax, but some cities may impose it. And while prescription medication is tax free, the state sales tax is quite high, at 10 percent in some areas.

  • State Income Tax: 2 – 5 percent
  • State Sales Tax: 4 percent
  • Estate Tax: No
  • Inheritance Tax: No

Some states, such as Florida, are famous for attracting retirees. A state without sales tax does sound appealing. But be cautious about other taxes that you might not think about. Where some states offer generous benefits, cities can impose other taxes that negate some or part of what’s great about living there.

NewRetirement can help you make the most of your retirement income, no matter where you choose to live. Start with our retirement calculator to learn how well your plan measures up to others in your area. From there, you’ll see options to help you improve. Whether you’re in a low-tax state or one where taxes are steep, a good strategy now can make all the difference later.

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