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Slide Show | August 2013

10 Most Tax-Friendly States for Retirees

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Just as you shouldn't let tax considerations drive your investment decisions, you shouldn't move to a state just because its taxes are low. But if you're considering several retirement destinations, taxes should certainly be a factor because they can have a significant impact on the amount of income you'll have to spend in retirement.

Likewise, if you have homes in more than one state, you could save money by establishing residency in the state with the lowest tax burden. If you opt for that strategy, be careful, because states are increasingly scrutinizing part-year residents, says Kathleen Thies, state tax analyst with CCH, a leading provider of tax information and software. In addition to spending more than half of the year in your chosen state, she says you should register to vote and obtain a driver's license there.

These ten states impose some of the lowest taxes on retirees in the U.S., according to Kiplinger's analysis of state tax rules.

SOURCES: State tax departments, CCH and the Tax Foundation.


10 Most Tax-Friendly States for Retirees

#1 Alaska

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State Income Tax: None
State Sales Tax: None
Estate Tax/Inheritance Tax: No/No

The Last Frontier is a tax haven for retirees who don't mind long winters and an occasional encounter with a bear. Alaskans pay no state income tax. In addition, the state sends all permanent residents an annual dividend check from the state's oil wealth savings account. The 2012 payment was $878 (the 2013 dividend will be announced in September).

The state doesn't have a sales tax. However, 104 municipalities impose local sales taxes of up to 7%. The statewide average is 1.69%, according to the Tax Foundation, a nonprofit organization in Washington, D.C.

While Alaska taxes real estate, homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed value of their property.

#1 Alaska

#2 Wyoming

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State Income Tax: None
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

The Equality State is a tax haven for cowboys and retirees alike. There is no state income tax. The state sales tax is low, and the average state and local combined tax rate is the eighth-lowest in the U.S., at 5.34%. Thanks to abundant state revenues from oil and mineral rights, Wyoming residents shoulder one of the lowest tax burdens in the U.S., according to the Tax Foundation.

Property tax rates, which are set by counties, school districts, cities and towns, and special taxing districts, are among the lowest in the U.S., according to the Tax Foundation. Median property tax on a $184,000 median-valued home is $1,058. Seniors who meet income requirements are eligible for a refund of up to $800 ($700 for single filers) for property taxes, utilities and sales/use taxes.

#2 Wyoming

#3 Georgia

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State Income Tax: 1% to 6%
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

Residents of the Peach State who are 65 and older can exclude up to $65,000 of retirement income (or $130,000 per couple) from state income taxes. Retirement income includes income from pensions and annuities, interest income, dividend income, net income from rental property, capital-gains income and income from royalties. Social Security is also exempt from state taxes.

The statewide sales tax is 4% (food and prescription drugs are exempt), but jurisdictions can add up to 4% of their own taxes.

A Georgia homeowner may pay a combination of county, city, school and state taxes, depending on location. Median property tax on a $162,800 median-valued home is $1,346, according to the Tax Foundation. Individuals age 65 and older are eligible for an exemption from all state property taxes on their home and up to ten acres of land. The state property tax is being completely phased out by 2016.

#3 Georgia

#4 Arizona

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State Income Tax: 2.59% to 4.54%
State Sales Tax: 5.6%
Estate Tax/Inheritance Tax: No/No

The Grand Canyon State is a major retirement destination, with plenty of sunshine and a low personal income tax rate. Social Security benefits are exempt, as is up to $2,500 of some retirement income.

Arizona's state sales tax has dropped a percentage point to 5.6% (a temporary increase expired in June 2013). Currently, all 15 counties levy a sales tax, ranging from 0.25% to 2%. Arizona state tax excludes food for home consumption and prescription drugs.

Tax jurisdictions set property tax rates, which vary considerably from one area to another. Median property tax on a $187,700 median-valued home is $1,356, according to the Tax Foundation. Single homeowners 65 and older who earn $3,750 or less and married couples who earn $5,500 or less are eligible for a tax credit of up to $502.

#4 Arizona

#5 Mississippi

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State Income Tax: 3% to 5%
State Sales Tax: 7%
Estate Tax/Inheritance Tax: No/No

The Magnolia State offers a sweet income tax deal for retirees. Social Security benefits and income from IRAs, 401(k)s, 403(b)s, Keoghs, and public and private pension plans are exempt from state income taxes.

Prescription drugs, residential utilities, motor fuel, newspapers and health care services are exempt from state sales taxes.

Mississippi is also home to some of the lowest property taxes in the nation, according to the Tax Foundation. Median property tax on a $98,000 median-valued home is $508, the Tax Foundation calculates. Seniors who are eligible for the state's homestead exemption are exempt from taxes on the first $75,000 of value.

#5 Mississippi

#6 Delaware

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State Income Tax: 2.2% to 6.75%
State Sales Tax: None
Estate Tax/Inheritance Tax: Yes/No

The First State is one of the tax-friendliest states on the East Coast. Social Security benefits are exempt from state income taxes. Residents 60 and older can exclude $12,500 per person of qualified pension benefits and investment income, including dividends, interest and capital gains, from income taxes. Taxpayers 65 and older who don't itemize are eligible for an additional standard deduction of $2,500 on top of the state's regular $3,250 standard deduction ($6,500 for couples filing jointly).

Real estate is subject to county, school district, vocational school district and municipal property taxes. Property is assessed at different percentages of market value, according to locality. The median property tax on a $249,400 median-valued home is $1,078, according to the Tax Foundation. Homeowners 65 and older are eligible for a credit equal to half of their school property taxes, up to $500. Residents who moved to Delaware after December 31, 2012, must live in the state for three consecutive years to qualify for the credit.

Delaware's estate tax mirrors the federal estate tax: In 2013, $5.25 million is exempt. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.

#6 Delaware

#7 Nevada

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State Income Tax: None
State Sales Tax: 6.5%
Estate Tax/Inheritance Tax: No/No

The Silver State offers retirees a jackpot of tax savings. There is no state income tax. Its state sales tax was reduced from 6.85% to 6.5% in July. Food and prescription drugs are exempt. Counties may add up to an additional 1.25%.

All property in the state is subject to tax by the state, counties, cities, towns and school districts. Median property tax on a $207,600 median-valued home is $1,749, according to the Tax Foundation. There are no property tax breaks for seniors.

#7 Nevada

#8 Louisiana

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State Income Tax: 2% to 6%
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

Let the good times roll. The Pelican State exempts Social Security and military, civil-service, state and local government pensions from state income taxes. For those 65 and older, up to $6,000 per person of private pension, annuity income and IRA distributions are also exempt from income taxes.

Local parishes and jurisdictions within those parishes may add their own sales taxes to the state tax, which can boost the total to 10.75%. Food, drugs, wheelchairs and prosthetic devices are exempt from the state sales tax, but they may be taxed locally.

Property taxes are the lowest in the nation, according to the Tax Foundation. Median tax on a $135,400 median-valued home is $243 a year, the Tax Foundation calculates. Retirees who are 65 or older with adjusted gross income of less than $65,891 are eligible to have their home's assessed value frozen for as long as they live in the home.

#8 Louisiana

#9 South Carolina

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State Income Tax: 3% to 7%
State Sales Tax: 6%
Estate Tax/Inheritance Tax: No/No

The Palmetto State extends its Southern hospitality to retirees. The state doesn't tax Social Security benefits. If you're 65 or older, up to $15,000 ($30,000 for a married couple) of retirement income is tax-free, regardless of the source. A surviving spouse may continue to take a retirement deduction on behalf of the deceased spouse.

Groceries and some cold prepared foods, prescription drugs, dental prosthetics and hearing aids are exempt from the state's sales tax. However, localities can add up to 3%.

Property taxes are among the lowest in the U.S., according to the Tax Foundation. Median tax on a $137,500 median-valued home is $689, the Tax Foundation calculates. Homeowners 65 and older qualify for a $50,000 homestead exemption. Senior homeowners are also exempt from school taxes on their properties.

#9 South Carolina

#10 Florida

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State Income Tax: None
State Sales Tax: 6%
Estate Tax/Inheritance Tax: No/No

It's not just the fishing that attracts retirees to the Sunshine State. Florida has no state income tax. Sales taxes, though, can go as high as 7.5%.

All property is taxable at 100% of its market value. Residents are eligible for a homestead exemption of up to $50,000. Some city and county governments give residents ages 65 and older who meet certain income limits an additional homestead exemption of up to $50,000. Median tax on a $182,400 median-valued home is $1,773, according to the Tax Foundation.

#10 Florida

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