Which Are the Most Tax Friendly States for Retirees 2020-2021?

By looking for the states with lowest taxes for retirees, you can reduce your monthly expenses and have more money to do the things you really want to do.

Stephanie Faris

Published November 9th, 2020

Updated December 18th, 2020

Table of Contents

Key Takeaways
  • The top 10 tax-friendly states either have no income tax on retirement or lower overall taxes for retirees.
  • It’s important to also look at property taxes, sales tax, and general living expenses when considering relocating after retirement.
  • Some states tax retirement income but offer credits and exemptions that could reduce your liability.

Taxes are an inevitable part of retirement, but not all states have the same tax rates. By looking for the states with lowest taxes for retirees, you can reduce your monthly expenses and have more money to do the things you really want to do.

Some states tax Social Security and pensions, while others partly tax them or base taxation on your income levels. In a handful of states, you’ll pay no income tax whatsoever, but it’s important to look into other factors, like sales tax and overall cost of living. To help you get started, we’ve broken down tax rates by state, along with ranking the most and least tax-friendly states for retirees.

The 10 Most Tax-friendly States for Retirees

When you’re looking at the best states to retire to, taxes aren’t the only consideration. But by narrowing it down to the top 10, you can consider other amenities and find the state that checks off the most items on your wish list. Here are the top 10 most tax-friendly states.

  1. Wyoming
  2. Alaska
  3. Alabama
  4. Florida
  5. Georgia
  6. Delaware
  7. Mississippi
  8. Nevada
  9. South Dakota
  10. Pennsylvania

What do these states have in common? In most cases, they’re states that don’t tax Social Security and retirement income, which brings a big cost savings. Wyoming, Alaska, Florida, Nevada, and South Dakota are among the nine states without an income tax, and Wyoming doesn’t have a sales tax.

Another feature to look for when you’re searching for an affordable place to live is inheritance tax. All of the above states except Pennsylvania have no inheritance or estate tax. This is significant if you’re married and one spouse survives the other since it will leave more behind for the surviving spouse.

The 10 Least Tax-friendly States for Retirees

If money’s a top concern, there are some states you should scratch off your list right away. The following ten states are the least tax friendly states for retirees.

  1. Nebraska
  2. Minnesota
  3. Illinois
  4. Connecticut
  5. New York
  6. Kansas
  7. Wisconsin
  8. New Jersey
  9. Vermont
  10. Ohio

Just as you look for states that don’t tax pensions before retiring, you’ll want to stay away from states that do tax them. Many of the above states will tax your income, regardless of the source. Nebraska not only taxes your retirement income, but also has high property taxes and inheritance taxes.

What Are the Different Kinds of Taxes Imposed by States?

Before you decide on your post-retirement home, it’s important to take a look at what the cost of living will be. There are three things to consider: state income tax, state tax on retirement income, and sales tax. The below tables separate out the sales, income, and retirement taxes by state as they stand currently.

Plan for a better future

Have you thought about how taxes will impact your retirement plans?

Income Taxes by State

There are two things to consider when looking at the best states to retire, tax-wise. First, there’s the state income tax, which applies to all earnings. The second is sales tax, which applies only to what you purchase. Some states have no income tax at all, which means you won’t pay state tax on your Social Security or other retirement income. Others have a state income tax but exempt retirement income, either in part or in whole. Here’s the breakdown of state income tax and retirement income tax by state.

StateState Income Tax?Retirement Income Tax?
Alabama2% to 5%Yes*
AlaskaNoNo
Arizona2.59% to 4.50%Yes
Arkansas2% to 6.60%Yes*
California1% to 13.30%Yes
Colorado4.63%Yes*
Connecticut3% to 6.99%Yes*
D.C.4% to 8.95%Yes
Delaware0% to 6.60%Yes*
FloridaNoNo
Georgia1% to 5.75%Yes*
Hawaii1.40% to 11%Yes*
Idaho1.125% to 6.925%Yes
Illinois4.95%No
Indiana3.23%Yes
Iowa0.33% to 8.53%Yes*
Kansas3.10% to 5.70%Yes
Kentucky5%Yes*
Louisiana2% to 6%Yes*
Maine5.80% to 7.15%Yes*
Maryland2% to 5.75%Yes*
Massachusetts5%Yes
Michigan4.25%Yes*
Minnesota5.35% to 9.85%Yes
Mississippi3% to 5%No
Missouri1.5% to 5.40%Yes*
Montana1.0% to 6.90%Yes*
Nebraska2.46% to 6.84%Yes
NevadaNoNo
New Hampshire5%Yes*
New Jersey1.40% to 10.75%Yes*
New Mexico1.70% to 4.90%Yes*
New York4% to 8.82%Yes*
North Carolina5.25%Yes
Ohio0% to 4.797%Yes*
Oklahoma0.50% to 5%Yes*
Oregon4.75% to 9.90%Yes*
Pennsylvania3.07%No
Rhode Island3.75% to 5.99%Yes*
South Carolina0% to 7%Yes*
South DakotaNoNo
Tennessee1% on dividends and earned interestYes*
TexasNoNo
Utah4.95%Yes*
Vermont3.35% to 8.75%Yes
Virginia2% to 5.75%Yes*
WashingtonNoNo
West Virginia3% to 6.50%Yes
Wisconsin4% to 7.65%Yes*
WyomingNoNo

*These states have some form of state income tax on retirement. However, there are exemptions and credits that will either reduce or exempt you from paying tax on your retirement income.**

Sales Taxes by State

In states that don’t tax retirement income, it’s important to take a close look at the sales tax. Some states, like Nevada and Tennessee, make up for low or no state income tax with higher sales tax. The below sales tax rates are the base. Local jurisdictions often add their own smaller amount to the base rate.

StateState Sales Tax
Alabama4.00%
Alaska0.00%
Arizona5.60%
Arkansas6.50%
California7.25%
Colorado2.90%
Connecticut6.35%
D.C.6.00%
Delaware0.00%
Florida6.00%
Georgia4.00%
Hawaii4.00%
Idaho6.00%
Illinois6.25%
Indiana7.00%
Iowa6.00%
Kansas6.50%
Kentucky6.00%
Louisiana4.45%
Maine5.50%
Maryland6.00%
Massachusetts6.25%
Michigan6.00%
Minnesota6.875%
Mississippi7.00%
Missouri4.225%
Montana0.00%
Nebraska5.50%
Nevada6.85%
New Hampshire0.00%
New Jersey6.625%
New Mexico5.125%
New York4.00%
North Carolina4.75%
North Dakota5.00%
Ohio5.75%
Oklahoma4.50%
Oregon0.00%
Pennsylvania6.00%
Rhode Island7.00%
South Carolina6.00%
South Dakota4.50%
Tennessee7.00%
Texas6.25%
Utah6.10%
Vermont6.00%
Virginia5.30%
Washington6.50%
Wisconsin5.00%
Wyoming4.00%

How to Estimate Your Retirement Taxes

If you know where you’ll be living after retirement, it’s quite a bit easier to estimate the amount you’ll pay in taxes after you retire. It’s even easier if you plan to live in one of the states that don’t tax retirement. But you’ll still need to keep property taxes, sales tax, and federal taxes in mind as you plan your budget.

One of the best ways to calculate post-retirement taxes is to look at what you’re paying now. Then compare that to the income you’ll have after retirement. If you plan to stay in your current house, you’ll already know what your property taxes will be but if not, you’ll need to estimate what your taxes will be for that, as well.

Final Thoughts

As you’re looking into what states do not tax Social Security and other income, keep in mind that taxes are only part of the overall picture. You’ll also need to look at the overall cost of living, which applies to everything from your weekly grocery bill to the home you choose. We recommend working with a Certified Financial Planner® who specializes in retirement planning to ensure you have enough set aside to live comfortably

Author

Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.