If you plan to move to another state when you retire, examine the tax burden you’ll face when you arrive. State taxes are increasingly important to everyone, but retirees have extra cause for concern since their income may be fixed.
Select your state from the map below to see the related tax information.
Many people planning to retire use the presence or absence of a state income tax as a litmus test for a retirement destination. This is a serious miscalculation since higher sales and property taxes can more than offset the lack of a state income tax. The lack of a state income tax doesn’t necessarily ensure a low total tax burden.
States raise revenue in many ways including sales taxes, excise taxes, license taxes, income taxes, intangible taxes, property taxes, estate taxes and inheritance taxes. Depending on where you live, you may end up paying all of them or just a few.
This section of our Web site provides you with information on state income taxes, sales and fuel taxes, taxes on retirement income, property taxes and inheritance and estate taxes, as well as sales and fuel taxes. It is intended to give you some insight into which states may offer a lower cost of living. To check out the state where you want to retire, just select from the state menu above.
Introduction to Taxes by State
Over the past few years, property prices have plummeted in many areas, but the same can’t be said for taxes, and now both real estate and taxes may be on the rise, according to CCH, a Wolters Kluwer business and global provider of tax, accounting and audit information. There are a lot of factors to consider in deciding where to retire and what’s going to be affordable. The different types of taxes you may need to pay are among the costs to look at.
Taxes that seniors should consider when evaluating the financial implications of where they may want to call home in retirement include:
* State taxes on retirement benefits;
* State income tax rates;
* State and local sales tax;
* State and local property taxes; and
* State estate taxes.
Taxability of Retirement Benefits Vary From State to State
Seven states do not tax individual income – retirement or otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – impose income taxes only on dividends and interest (5 percent for New Hampshire and 6 percent for Tennessee for 2014).
In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemption and some tax all retirement income.
States exempting pension income entirely for qualified individuals are Illinois, Mississippi and Pennsylvania. States exempting a portion of pension income include: Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Oklahoma, South Carolina, Utah, Virginia and Wisconsin. States generally taxing pension income include: Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska and North Carolina beginning with the 2014 tax year, North Dakota, Rhode Island, Vermont and West Virginia.
Several states have announced changes to income tax for retirement plans in 2013. They include:
Georgia: The personal income retirement exclusion amount has been capped at $65,000 for taxpayers 65 years of age or older and $35,000 for certain taxpayers between ages 62 and 65 – for tax years beginning after 2012.
Kentucky: The Kentucky Blue Ribbon Commission on Tax Reform proposed a reduction in the individual income tax pension exclusion from $41,110 to $30,000. It was introduced but not enacted.
Maine: In 2012, a law was enacted to limit the income tax deduction for certain retirement benefits for tax years beginning after 2013. The changes raises the deduction from $6,000 to $10,000 (reduced by the total amount of the taxpayer’s Social Security benefits and Federal Railroad Retirement benefits). The deduction is also expanded to include all federally taxable pension income, annuity income and individual retirement account (IRA) distributions, except pick-up contributions for which a deduction has been allowed.
Michigan: The deduction for pension benefits for senior citizens is curtailed based on the taxpayer’s birth year and household resources. Previously, this deduction was limited by a dollar amount, but no other limitation applied. Specifically, for persons born before 1946, the deduction for pension benefits is unchanged (see chart below). However, for persons who have not yet reached age 67 and who are born in 1946 through 1952, the deduction for pension benefits is limited to $20,000 for a single return and $40,00 for a joint return. Once the person reaches age 67, the pension benefits deduction is no longer applicable. However, all taxpayers who are age 67, regardless of the year they are born, claim a deduction of $20,000 for a single return and $40,000 for a joint return against all types of income in lieu of claiming the social security deduction and personal exemption.
North Carolina: The $2,000 deduction for income form private retirement plans is being repealed for 2014.
Oregon: The pension credit against personal income taxes was extended for an additional six years.
While some states tax pension benefits, only 14 states impose a tax on Social Security income: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide breaks for Social Security income, often for lower-income individuals.
Impact of State Income, Property, and Sales Taxes
In addition to state taxes on retirement benefits, other taxes that seniors should consider when evaluating the financial implications of where they may want to retire include:
State income tax rates. For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country.
Since some retirees will face higher federal income taxes, they may look more closely at states with lower or no income tax rates as one way to help offset their overall tax obligation.
While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, New Mexico and North Dakota are below 5 percent. Some states have a relatively low flat tax regardless of income, with the three lowest: Indiana (3.4 percent), North Dakota (3.99 percent) and Pennsylvania (3.07 percent) for 2013.
State and local sales taxes. Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax). Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate. States with the highest sales tax are: California (7.5%), Indiana (7%), Mississippi (7.0%), New Jersey (7.0%), Rhode Island (7.0%), Tennessee (7%), Minnesota (6.875%), Nevada (6.85%), Arkansas (6.5%), Washington (6.5%), and Connecticut (6.350%).
State and local property taxes. While property values have declined over recent years in many areas, that has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.
State estate taxes. Estate taxes also can influence where seniors want to retire. Rules vary from state to state as well as from federal estate tax laws. For example, 18 states impose a tax on estates valued below the $5.25 million federal threshold for 2013 ($5.12 million for 2012); only Delaware, Hawaii and North Carolina use the federal exclusionary amount.
Although several states do not collect estate taxes, many still have estate tax laws on their books. For example, Texas does not currently collect estate taxes from residents, but its estate tax is still in its state Tax Code. Of the 29 states that do not collect estate taxes, 26, including Texas, are tied to the federal estate tax state death tax credit – meaning estate tax statutes remain in their Tax Codes. Only three states that do not collect estate taxes, Arizona, Kansas and Oklahoma, have actually repealed the estate tax from their Tax Codes and statutes.
“The American Taxpayer Relief Act of 2012 brings more clarity on the federal level that only estates above the $5 million mark indexed for inflation will be subject to the federal estate tax,” said CCH. “However, the threshold in some states can be below $1 million for state estate taxes, which can impose additional planning challenges.”
- Comparison of State Death Taxes (Click here)
- State Taxation of Retirement Income (Click here)
- State Tax Treatment of Social Security and Pension Income (Click here)
Most states give residents over a certain age a break on their property taxes. With some taxes, you’ll need a relatively low income to qualify. Forty states provide either property tax credits or homestead exemptions that limit the value of assessed property subject to tax.
- Individual state tax and revenue departments
- State Tax Handbook (2014); published by CCH Inc.
- Federation of Tax Administrators
- The Tax Foundation
- National Conference of State Legislatures
Updated January 2014; based on available data.