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All Contents © 2020The Kiplinger Washington Editors
By Rocky Mengle, Tax Editor
David Muhlbaum, Senior Online Editor
| November 5, 2019
If you're thinking of moving to a different state in retirement, you'll want to consider climate, proximity to family and friends, access to quality health care, and a host of other important factors before picking a new location. But make sure you add taxes in the new state to the list of considerations. The total state and local tax burden in one place can be thousands of dollars more per year than in another. That can make a huge difference when you're trying to stretch out your retirement savings.
To help retirees analyze the overall tax burden in each state, we've updated our State-by-State Guide to Taxes on Retirees for 2019 and identified the 10 states that impose the lowest taxes on retirees. Our results are based on the estimated state and local tax burden in each state for a hypothetical retired couple with a mixture of income from Social Security, an IRA, a private pension, interest and dividends, and capital gains. We also gave them a $400,000 home (with a small mortgage) and $10,000 in deductible medical expenses.
All the states on our "most tax-friendly" list exempt Social Security benefits from state income taxes. Most also exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. They tend to have below-average property tax rates and/or reasonable sales tax rates, too. Take a look and see for yourself. We list the most tax-friendly state for retirees last.
See the final slide for a complete description of our ranking methodology and sources of information.
State income tax: 2.59% (on taxable income of $26,500 or less for single filers; $53,000 or less for joint filers) — 4.5% (on taxable income over $159,000 for single filers; over $318,000 for joint filers)
Average state and local sales tax: 8.39%
Average property tax: $754 per $100,000 in home value
Estate tax/Inheritance tax: No/No
Go to Arizona's full state profile
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. Income tax rates are relatively low, too.
The state-wide average property tax on our hypothetical couple's $400,000 home in Arizona is only $3,014 per year, which is below average for the U.S. In addition, homeowners age 65 and older can "freeze" the value of their property for real estate tax purposes for three years if they lived in the home for at least two years and their annual income is below $37,008 (one owner) or $46,260 (multiple owners). Arizona also has a property tax deferral program for homeowners who are at least 70 years old and do not have more than $10,000 of taxable income per year (residency, home value, and other eligibility requirements apply).
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.
State income tax: 1% (on taxable income of $750 or less for single filers; $1,000 or less for joint filers) — 5.75% (on taxable income over $7,000 for single filers; over $10,000 for joint filers)
Average state and local sales tax: 7.33%
Average property tax: $1,000 per $100,000 in home value
Estate tax/Inheritance tax: No/No
Go to Georgia's full state profile
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. Plus, the top income tax rate will drop from 5.75% to 5.5% in 2020 if the governor and legislature reconfirm the reduction in that year's legislative session.
The statewide sales tax is 4%, but jurisdictions can add up to 5% of their own taxes. The average combined state and local sales tax rate is 7.33%, which is an above-average rate. While the state doesn't tax groceries, localities can.
At $4,000 per year, the average property tax on a $400,000 home in the state is slightly below the national average. Georgia also offers a number of programs to reduce the property tax burden on seniors; some start at age 62, and some at age 65.
Your heirs will also be happy to know that there are no estate or inheritance taxes in Georgia.
National Park Service
State income tax: None
Average state and local sales tax: 7.05%
Average property tax: $1,041 per $100,000 in home value
Go to Florida's full state profile
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 8.5%, 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. The average annual property tax on a $400,000 home in the state is $4,166, which is also average. Florida residents ages 65 and older who meet certain income limits can also 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 $30,174 in 2019. Any widow or widower who is a Florida resident may claim an additional $500 exemption as well.
You don't need to worry about estate or inheritance taxes in Florida, either.
Loco Steve via Flickr/Creative Commons
State income tax: 3% (on taxable income of $2,000 to $5,000) — 5% (on taxable income over $10,000)
Average state and local sales tax: 7.07%
Average property tax: $862 per $100,000 in home value
Go to Mississippi's full state profile
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. In 2019, the first $2,000 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. Plus, motor vehicle sales are taxed at only 5%.
Mississippi charges an annual personal property tax motor vehicles. The amount is based on the vehicle's age and value. However, property taxes on residential real estate aren't too bad. If our fictional couple owned a $400,000 house in Mississippi, they would pay an estimated $3,447 per year in property taxes for the home, which is below the U.S. average.
Finally, there are no estate or inheritance taxes in Mississippi.
State income tax: 2% on interest and dividends
Average state and local sales tax: 9.47%
Average property tax: $768 per $100,000 in home value
Go to Tennessee's full state profile
Residents of the Volunteer State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans. That's because there's no broad-based income tax in Tennessee—only interest and dividends are subject to the state's limited income tax. Plus, anyone 65 years of age or older with total annual income of $37,000 or less ($68,000 or less for joint filers) is completely exempt from the 2% tax. It's also waived if you're at least 100 years old. On top of all that, the tax is being phased out at a rate of 1% per year. So it will be completely eliminated by 2021.
There are also no estate or inheritance taxes in Tennessee. That will put your heirs at ease.
Property taxes in Tennessee aren't too bad, either. For instance, the owner of a $400,000 home in the state would pay about $3,072 per year in property taxes. That's well below the national average. There are also property tax relief programs in the state offering property tax reimbursements to income-eligible senior citizens. Tennessee also has a property tax freeze program for homeowners age 65 and older.
Watch out for Tennessee's sales tax, though. The state's 9.47% average combined state and local sales tax rate is the highest in the country. Tennessee is also one of the few states where groceries are subject to sales tax—they are taxed at a 4% rate.
State income tax: 3% (on taxable income of $3,030 to $6,060) — 7% (on taxable income over $15,160)
Average state and local sales tax: 7.46%
Average property tax: $601 per $100,000 in home value
Go to South Carolina's full state profile
The Palmetto State extends some real southern hospitality to retirees by offering a charming collection of income tax breaks. To start, Social Security benefits are completely exempt. In addition, taxpayers age 65 or older can exclude up to $10,000 of retirement income (up to $3,000 for taxpayers under 65). Seniors can also deduct $15,000 from other taxable income ($30,000 for joint filers). Plus, veterans who are at least 65 years old can exclude up to $27,000 of income from a military retirement plan (up to $14,600 for veterans under 65). The military pension exclusion is even going up to $30,000 in 2020 ($17,500 for taxpayers under 65).
Low property tax rates in South Carolina help retirees, too. The state-wide average property tax on a $400,000 home in the state is only $2,404. That's the fourth-lowest amount in the country. Seniors can also claim a homestead exemption for the first $50,000 of their property's fair market value. To qualify, you must have been at least 65 years old and a legal resident of South Carolina for one year, as of July 15 the year the exemption is claimed.
The lack of an estate or inheritance tax also makes South Carolina a desirable location for wealthy seniors.
There is some bad news, though. Sales taxes are on the high end in South Carolina. There's a 6% state-wide levy, and local governments can add as much as 3%. The average combined rate is 7.46%, which is well above average. Counties also impose an annual tax on your motor vehicle's value.
State income tax: 2% (on taxable income of $500 or less for single filers; $1,000 or less for joint filers) — 5% (on taxable income over $3,000 for single filers; over $6,000 for joint filers)
Average state and local sales tax: 9.16%
Average property tax: $432 per $100,000 in home value
Go to Alabama's full state profile
If you're a huge 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 Camellia 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 scores a touchdown when it comes to property taxes, too. If our hypothetical couple owned a $400,000 home there, they would only pay about $1,729 per year in real estate taxes. That's the second-lowest amount in the country. There are also a few state and local property tax breaks available for senior citizens. For instance, 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.
Wealthy Alabamans can spike the ball at the end of the game, because they'll get to pass on more of their assets to their heirs. That's because the state has no estate or inheritance tax.
But Alabama fumbles when it comes to sales taxes. At 4%, the state rate is low, but some local governments tack on up to 7% in additional sales taxes. As a result, the state-wide average combined (state and local) sales tax rate is 9.16%, which is the fifth-highest in the nation. Alabama is also one of the few states that taxes groceries. Fortunately, car sales are taxed at lower rates—a 2% state rate and local rates up to 5.25%. (However, most vehicles are subject to an annual property tax, with rates set by municipality.)
State income tax: 2.2% (on taxable income of $2,000 to $5,000) — 6.6% (on taxable income over $60,000)
Average state and local sales tax: 0%
Average property tax: $604 per $100,000 in home value
Go to Delaware's full state profile
No sales tax, low property taxes, and no death taxes make Delaware a tax haven for retirees. It's easier to spoil the grandkids when you pay zero state or local sales tax on your in-state purchases (the First State is one of only a handful of states with no sales tax).
You'll also have more disposable income to spend on the grandkids, since property taxes are so low. The average annual property tax bill in Delaware on a $400,000 home is just $2,414, which is the sixth-lowest amount in the nation. Plus, some Delaware seniors qualify for a school property tax credit of up to $400 (you might have to live in the state for 10 years to get it, though).
Since there are no estate or inheritance taxes in Delaware, you can pass along more of your wealth to the grandkids, too (or to other family, friends or charities).
The only downside—and it really isn't that bad—are middle-of-the-road income taxes. The rates are comparatively reasonable, and residents age 60 and older can exclude up to $12,500 of pension and other retirement income (including dividends and interest, capital gains, IRA and 401(k) distributions, etc.). Social Security benefits are also exempt. Nevertheless, in the end, income taxes add enough to a retiree's overall tax burden to keep the state out of the top spot on our list.
Average state and local sales tax: 8.14%
Average property tax: $693 per $100,000 in home value
Go to Nevada's full state profile
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.
If our make-believe couple retired to Nevada and bought a $400,000 home, they should expect to pay around $2,771 per year in property taxes on the residence. That's considerably below the national average for a home of that value. Unfortunately, however, 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 14th-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.
Average state and local sales tax: 5.32%
Average property tax: $635 per $100,000 in home value
Go to Wyoming's full state profile
The Equality State is tax-friendly to all residents, including retirees. Thanks to abundant revenues that the state collects from oil and mineral rights, Wyoming retirees shoulder the lowest overall state and local tax burden in the U.S., according to our calculations. There are no income, estate or inheritance taxes…and sales taxes are low, too (the average combined state and local sales tax rate is only 5.32%).
You won't pay high property taxes to own a home on the range, either. For a $400,000 home in Wyoming, the state-wide average annual property tax bill comes to just $2,540, which is the ninth-lowest amount 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.
Our maps and other tax content include data and state tax-policy details from a wide range of sources. To create our rankings, we created a metric to compare the tax burden in all 50 states and the District of Columbia.
We looked at each state's tax agency, plus this helpful document from the Tax Foundation.
Values for median property tax paid and assessed home value in each state come from the U.S. Census American Community Survey and are 2017 data, the most recent available. We created a ratio of these: average taxes paid per $100,000 of home value.
Each state's tax agency. 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 local governments add sales taxes, this gives an estimate of what most people in the state actually pay, as those rates can vary widely.
Each state's tax agency.
The "tax-friendliness" of a state depends on the sum of income, sales and property tax paid by our sample filers.
To determine income tax, we prepared returns for a married couple with multiple sources of retirement income as described below.
They had a $2,000 mortgage interest deduction, as well as $10,000 in deductible medical expenses (including insurance premiums). For their federal return, our hypothetical couple claimed the standard deduction, but they were able to itemize in some states if that was more advantageous.
Since some states have local income taxes, we domiciled our filers in each state's capital, from Juneau to Cheyenne. We calculated these 2018 returns using software from Credit Karma.
How much the sample filers paid (and deducted, when possible) in property taxes was calculated assuming a residence with $400,000 assessed value and each state's average tax rate.
How much they paid in sales taxes was calculated using the IRS' Sales Tax Calculator, which is localized to zip code. To determine those, we used Zillow to determine zip codes with housing inventory close to our sample assessed value.