This article takes a look at the 13 states that don’t tax retirement income. If you wish to skip our detailed analysis on navigating retirement taxes, you may go to 5 States That Don’t Tax Retirement Income.
Navigating Retirement Taxes: Finding the True Cost of Greener Pastures
Retirees on fixed incomes are often lured in by the greener pastures that other states offer them. According to Hire a Helper, an online marketplace for finding reliable and affordable moving help across the United States, older Americans are on the move. As of 2023, an estimated total of 338,000 US residents moved to a new home, a 44% jump from the previous year. Their primary motive? Retirement.
For the second straight year, Florida ranked as the top destination for these moves. This result is in line with similar studies done on migration and relocation trends related to retirees, such as that conducted by U-Haul Holding Company (NYSE:UHAL), an American moving truck, trailer, and self-storage rental company. According to U-Haul Holding Company (NYSE:UHAL), Florida is one of the top states people moved to in 2023, with only one state beating it for first place: Texas. What these states have in common is no secret: low cost of living, ideal warm weather, and lots of retirees. However, the factor that precedes them all is that these states don’t tax retirement income.
For the average American, choosing where they live has a profound impact on their tax liability. This is why seniors on fixed incomes often ask where to retire to avoid taxes. The more they get to save on these taxes, the more of their retirement income they have left to spend on rent, groceries, utilities, and most importantly: healthcare. To help save the most, retirees often search and move to tax-free retirement destinations. The question is, does a place like this even exist? This is what Hayden Adams, Schwab Center for Financial Research from The Charles Schwab Corporation (NYSE:SCHW) has to say,
“Florida's lack of an income tax may seem like a bargain, but property tax there is high, and the government raises the bulk of its revenue through state and local sales taxes. That's why it's important to consider your entire tax burden”. -Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research, The Charles Schwab Corporation (NYSE:SCHW)
Bottom line: even if states don’t tax you for your retirement income, chances are that they are imposing a high sales tax, property tax, or some other tax you might not be aware of. This is why retirees must consider the tax implications of retiring in different states. Doing so will maximize one’s chances of choosing the best state to retire for taxes and cost of living.
Hayden summarizes this best:
"Whether you're a retiree, a remote worker, or just looking for a change of scenery, the idea of pulling up stakes for purportedly greener pastures isn't that unusual these days. However, the tax implications can be profound, so it's smart to take a hard look before you break out the packing tape." - Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research, The Charles Schwab Corporation (NYSE:SCHW)
Ranking states based on tax friendliness is complex and subjective, hinging on individual factors such as income level, property ownership, estate size, preferred location, and the benefits offered by each state in exchange for taxes. Ultimately, the significance of different taxes varies depending on one's stage of life and personal circumstances.
In these cases, consulting a financial advisor can be the best foot forward. These people can help you, as a retiree, choose some of the best tax-friendly states with low cost of living, depending on your situation and level of income. They may know rules that you’re not aware of, and they even help you save more in the long run.
With that said, let’s discover some of the states that don’t tax retirement income, and also explore where else they’re getting all the revenue from.
13 States That Don't Tax Retirement Income
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Methodology
To compile the list of states that don’t tax retirement income, we began by listing out all the states of the United States. Next, we selected the states with no income tax. In addition to these states, we added other states with income tax that make an exception for retirement income like 401(k)s, IRAs, and pension distributions, as well as Social Security benefits. Next, we ranked them on their combined sales tax rate, property tax rate, cost of living index, and overall tax friendliness to determine their final scores. States have been ranked in ascending order from the lowest to the highest scores. The cost of Living Index has been sourced from the Missouri Economic Research & Information Center, sales taxes have been sourced from the Tax Foundation, and property tax is from Rocket Mortgage.
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Here are the states that don’t tax retirement income:
13. Washington
Insider Monkey Score: 18
Cost of Living Index: 116
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 6.50%
Average Local Tax Rate: 2.878%
Average Property Tax Rate: 0.84%
The state of Washington is generally classified as a tax-friendly state. There is no state income tax on social security or retirement income, which is why seniors get to enjoy more of their fixed incomes. While property tax rates in the state hover slightly below the national average, Washington relies heavily on its sales tax rate for revenue. Statewide, the sales tax stands at 6.5%, with additional levies imposed by certain cities and counties, reaching up to 4%. Consequently, seniors may encounter a combined sales tax burden of up to 10.5%.
12. Illinois
Insider Monkey Score: 20
Cost of Living Index: 92.1
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 6.25%
Average Local Tax Rate: 2.605%
Average Property Tax Rate: 2.07%
Illinois is a good option for retirees seeking tax-friendly environments, with a flat income tax rate of 4.95% exempted on retirement income, including social security, pensions, and distributions. However, the state grapples with high sales and property taxes. Seniors face an average property tax rate of 2.07%, burdening property ownership. Illinois is also one of the states that don’t tax military retirement pay.
11. Texas
Insider Monkey Score: 21
Cost of Living Index: 92.7
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 6.25%
Average Local Tax Rate: 1.950%
Average Property Tax Rate: 1.6%
Texas, renowned for its lack of income tax, beckons retirees with its tax-friendly allure. No wonder the state is U-Haul Holding Company (NYSE:UHAL)’s top growth state for 2023. Seniors relish the advantage of tax-free retirement income alongside a lower-than-average cost of living. At the same time, the state faces towering property and sales taxes, with an average effective tax rate of 1.6%, which is quite high. Overall, Texas is one of the best states to retire to for taxes and cost of living.
10. Tennessee
Insider Monkey Score: 27
Cost of Living Index: 90.3
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 7%
Average Local Tax Rate: 2.548%
Average Property Tax Rate: 0.56%
One of the states that is best to retire in financially is Tennessee. Tennessee doesn't impose an income tax, which means retirees can keep more of their social security and retirement income. Additionally, property taxes are relatively low, making it attractive for retirees. However, sales tax can be high, with an average combined rate of around 9.61%, though the set rate is 7%. Despite this, the cost of living is lower than the national average, helping to balance expenses.
9. Pennsylvania
Insider Monkey Score: 31
Cost of Living Index: 95.6
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 6%
Average Local Tax Rate: 0.341%
Average Property Tax Rate: 1.36%
Pennsylvania stands out as a tax-friendly state by exempting social security and payments from retirement accounts from taxes. Seniors aged 60 and over enjoy exemption from taxes on pension income as well. Adding to its appeal, Pennsylvania offers a cost of living 4.4% below the national average, allowing retirees to maximize their retirement income.
8. New Hampshire
Insider Monkey Score: 32
Cost of Living Index: 114.1
Tax-Friendliness: Tax-Friendly
Statewide Sales Tax Rate: 0%
Average Local Tax Rate: 0%
Average Property Tax Rate: 1.77%
New Hampshire emerges as another tax-friendly state for retirees by exempting social security and most retirement income from taxation. However, dividends and interest face a declining tax rate, with a complete repeal scheduled after 2024. Furthermore, the state boasts no sales tax, adding to its appeal. However, New Hampshire's property tax rates rank among the nation's highest, averaging 1.77%. Additionally, its cost of living exceeds the national average by 14.1%.
7. Iowa
Insider Monkey Score: 33
Cost of Living Index: 90.3
Tax-Friendliness: Moderately Tax-Friendly
Statewide Sales Tax Rate: 6%
Average Local Tax Rate: 0.941%
Average Property Tax Rate: 1.50%
Ranking 7th on our list of states that don’t tax retirement income is Iowa. Iowa exempts all sorts of Social Security income from taxes. Moreover, the state no longer taxes retirement income since tax year 2023, provided that individuals are 55 years of age or older on December 31 of the tax year. The exemption also applies to disabled and surviving spouses or other survivors having an insurable interest in an individual who qualified for the exclusion in the tax year based on age or disability.
6. Alaska
Insider Monkey Score: 34
Cost of Living Index: 125.2
Tax-Friendliness: Very Tax-Friendly
Statewide Sales Tax Rate: 0%
Average Local Tax Rate: 1.821%
Average Property Tax Rate: 1.17%
Alaska's tax-free status on retirement income and absence of sales, estate, or inheritance taxes make it a prime choice for retirees. The Alaska Permanent Dividend Fund further sweetens the deal for eligible Alaskan residents. The state offers incentives to individuals who choose to live there permanently through this fund. However, its slightly higher property taxes, harsh climate, and elevated living costs make it one of the worst states to retire.
