During your retirement years, you will need to ensure you make the most out of your finances. When it comes to taxes, some areas of the United States offer a more tax-friendly living environment for seniors than others in terms of what Social Security benefits are taxed, the level of property taxes, and the ways in which pension payments are taxed. Here’s our guide to what’s on offer in various states throughout the US.
18. Least: Connecticut
Connecticut is another offender when it comes to taxing retirement income. All forms of retirement income are taxed in the Nutmeg state, including Social Security. While low-income seniors will benefit from some exemption, the high property taxes that are in place in the state mean that it is perhaps not the best place to live for seniors who have a limited income. The median property tax paid in Connecticut is a massive $5,000 per year. What’s more, the estate tax has an exemption of just $2 million, which is less than 25% of the 2018 federal exemption.
17. Most: Utah
Utah offers the 13th lowest property tax per capita in the United States and features among a list of 20 states that offers the lowest income taxes. Furthermore, at 5.95%, its sales tax is aligned with the national median. Combine that with the mean local tax of just $0.93% and retirees can benefit from a sales tax of just 6.88%.
16. Least: Illinois
Illinois has been plagued by economic issues in recent years, and it is for this reason that the Prairie State is featured at the top of our list of the least tax-friendly state in the United States. While the majority of states do not add sales tax to food and drugs, Illinois does, to the tune of a minimum of 1%. Illinois is also one of a handful of states that still levies an estate tax, and it also charges the highest mean state and local tax on wireless cellphone services. Finally, the cost of living is further increased due to the high gas taxes in the state, which are the third-highest in the country. You might want to avoid this state to get the most of your retirement funds.
15. Most: Florida
The Sunshine State attracts retirees in their droves, and the beneficial tax environment is one fundamental reason why. There is no income tax in Florida, which means that retirees enjoy tax-free retirement income and Social Security. The benefits extend way beyond this. Although the majority of income-tax-free states in the US compensate for the lost revenue by levying high taxes on sales or property, Florida’s taxes in this domain are comparable to the national average. Furthermore, there are no inheritance or estate taxes in Florida.
14. Least: Rhode Island
Rhode Island doesn’t give retirees much leeway when it comes to taxation. It is one of the few states in the United States to tax retirement income at a rate that varies between 3.75% and 5.99%. In addition, retirees also face taxation on their Social Security retirement benefits, albeit this tax is limited to Social Security income that is taxable at the federal level. The sales tax rates in the Ocean State are slightly above the national mean. Rhode Island also has the 11th highest property tax rate in the United States, at 1.65%. All this taxation is against a backdrop of a cost of living that is 21% higher than the national average.
13. Most: Mississippi
Mississippi is a great destination for seniors who are seeking an opportunity to enjoy a low-tax existence. Social Security retirement benefits, IRAs, pensions, and 401(k)s are all tax-exempt in the Magnolia state, and it also offers some of the lowest property tax rates in the United States. What’s more, Mississippi’s sales tax rates sit around the US average, and there is no inheritance and estate taxation in place.
12. Least: California
The cost of living in California is a whopping 18% higher than that of the national average. In addition to being taxed (unlike Florida and Alaska), any income that is derived from pensions and retirement accounts is subjected to some of the highest income tax rates in America. Although retirees benefit from exempt Social Security retirement payments, the gains here are rapidly lost due to the high cost of living in the state. In fact, the average retiree would find it very difficult to survive in California on Social Security income alone.
11. Most: Indiana
Indiana already has a reputation for offering some of the lowest tax rates in the US. However, it seems that the situation is set to get even better, with the state planning to reduce the sales tax from 7% to 4.9% over the next three years. This follows from a recent reduction in income tax.
10. Least: Maine
Although Social Security income is not subject to taxation in Maine, many alternative types of retirement income are. Seniors who are in receipt of a retirement income via a pension, IRA, or 401(k) face income taxes as high as 7.15%. In addition, the property taxes levied in Maine are above the national average. In recent times, Maine modified its estate tax exemption so that it was aligned with the federal exemption of $11.2 million.
9. Most: Alaska
Alaska is one of the United States’ most tax-friendly destinations for retirees. In fact, all inhabitants of Alaska benefit from low taxes. In addition to having no state income tax, there is no statewide sales tax either. Although some local governments do collect their own sales taxes, these average out at around 1.76%, so they are considerably lower than those levied elsewhere in America. While the tax rates charged on properties in Alaska are comparable to other states in the United States, seniors are permitted to exempt the majority of the value of their home, if not the full value, from property taxes.
8. Least: Wisconsin
If you retire in Wisconsin, you can expect high property and income taxes. However, if you rely purely on Social Security or government pension and do not own a home, you will benefit from relatively low retirement taxes. On the flip side, if you are fortunate to have a high income from a retirement account such as a 401(k) and you are a property owner, you may encounter high retirement taxes.
7. Most: Wyoming
Wyoming is pretty much the most tax-friendly state in the United States south of Alaska. Like Alaska and Florida, there is no state income tax in place, which means seniors can enjoy tax-free retirement income. In addition, the mean effective property tax rate in Wyoming is a mere 0.61%. Combine this with a state and average local sales tax rate of 5.40% and no inheritance or estate tax, and you have a very attractive retirement destination.
6. Least: Iowa
Property taxes and income levels are both high in Iowa, rendering it a less desirable destination for seniors who are looking for a tax-friendly retirement state. The high-income taxes can be traced back to the fact that the 200+ school districts and Appanoose County include an additional income tax on state-level taxation. What’s more, the tax rate levied against properties in this state is the 12th highest in the United States.
5. Most: Nevada
Another income-tax-free destination that is worth checking out on a quest to find tax-friendly states is Nevada. Like other states on this list, there is no state income tax in place in Nevada, so any retirement income you earn, including income derived from Social Security and retirement accounts, will be not subject to state-level income tax. Furthermore, the property tax sits at an average of just 0.77% in Nevada, and the mean total sales tax rate is 7.98%. While this latter figure is greater than the national average, only the retirement tax is higher in Nevada than in the rest of the nation. There are no inheritance or estate taxes in place in Nevada.
4. Least: Vermont
Vermont is one of the few states to tax all types of retirement income, and it does so at a relatively high rate. For instance, if you have a taxable income of between $37,650 and $91,150, you will face an income-tax rate of 6.8%. This is made all the worse by the fact that the general tax rates are also relatively high in comparison to alternative states. For example, the average sales tax is 6.18%, and the majority of homeowners face property taxes in excess of $3,800 per year.
3. Most: South Dakota
South Dakota is another attractive destination for seniors who are seeking a low cost of living. There is no state income tax in place in The Mount Rushmore State; as such, all forms of retirement income are tax exempt. Furthermore, South Dakota offers moderate property taxes and a low cost of living.
2. Least: Nebraska
Nebraska charges tax on Social Security income; as such, it is not one of the most tax-friendly states in the United States. In addition, property taxes are high, with the Cornhusker state ranking the 8th highest in the nation in terms of property taxes. Although the sales and income taxes that are levied in Nebraska sit around the average of the United States as a whole, the high property tax rate makes living in this state relatively expensive. Furthermore, both inheritance and property tax rates are high in Nebraska.
1. Most: Georgia
One of the biggest draws of Georgia when it comes to retirement destinations is that the state does not tax Social Security. In addition, all retirement income is provided with a tax deduction of up to $65,000 for residents aged 65 and older. Furthermore, both the property and sales tax rates are relatively low in comparison to the rest of the nation. Finally, there are no estate or inheritance taxes in place.