10 Most Tax Friendly States For Retirees

Dear Rich Lifer,

Depending where you live, tax season takes a bigger bite out of retirement for some more than others.

If you’re newly retired and considering a move to a more tax-friendly state, there are several things you need to consider before putting up a for sale sign on your lawn.

First, don’t assume a state is good to retire in if it has zero income tax.

Retirees often overlook other taxes like sales tax, property, estate, and inheritance tax which have more of an impact on your nest egg than income tax.

Only after you factor these in, do you get a clearer picture of which states are most tax-friendly for retirees.

In addition to taxes, you should also consider proximity to quality healthcare, recreational activities, crime rates, and overall quality of life that a state can provide you.

So, what are the best states to retire in?

Based on recent data collected from Kiplinger, here are the top 10 most tax-friendly states for retirees.

10. Tennessee

  • State Income Tax Range: 1% on interest and dividends
  • Average Combined State and Local Sales Tax Rate: 9.55%
  • Median Property Tax Rate: $636 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

“Residents of the Volunteer State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans,” says Kiplinger.

This is because there’s no broad-based income tax in Tennessee. You only pay tax on interest and dividends. And if you’re 65 or older with a total annual income of $37,000 or less ($68,000 or less for joint filers), you’re completely exempt from the 1% tax.

The 1% tax is also waived if you make it to 100 years or older. In addition, the tax is being phased out at a rate of 1% per year, so by 2021, it’ll be completely gone.

9. Arkansas

  • State Income Tax Range: 0.75% (on taxable income up to $4,499 for taxpayers with net income from $22,200 to $79,300) to 6.6% (on taxable income over $79,300 for taxpayers with net income above $79,300)
  • Average Combined State and Local Sales Tax Rate: 9.53%
  • Median Property Tax Rate: $612 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

When you think of retirement havens, Arkansas probably doesn’t pop into your mind. But from a tax standpoint, the Natural State has a lot to offer.

The state’s income tax rates favor retirees with lower incomes and Social Security benefits are tax-free. Arkansas also has relatively low property taxes. At about $612 per year, Arkansas’ median property tax rate is well below the national average. The only knock on Arkansas is its state sales tax.

“The statewide sales tax is 6.5%, and local jurisdictions can add up to 5.13% of their own taxes. When you add it all up, Arkansas has the second-highest average combined state and local tax rate in the country,” says Kiplinger.

8. Arizona

  • State Income Tax Range: 2.59% (on taxable income up to $27,272 for single filers; up to $54,544 for joint filers) to 4.5% (on taxable income over $163,632 for single filers; over $327,263 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 8.4%
  • Median Property Tax Rate: $617 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

Is it any surprise that the Grand Canyon State makes it on this list? With no tax on Social Security benefits and low income tax rates, plus an endless supply of vitamin D, who wouldn’t want to retire in Arizona.

AZ also has relatively low property taxes compared to the national average. “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 $37,584 (one owner) or $46,980 (multiple owners),” says Kiplinger.

Sales taxes in Arizona are a bit high but not having an inheritance or estate tax make up for it, especially for wealthier retirees.

7. South Carolina

  • State Income Tax Range: 3% (on taxable income from $3,070 to $6,150) to 7% (on taxable income over $15,400)
  • Average Combined State and Local Sales Tax Rate: 7.46%
  • Median Property Tax Rate: $545 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

“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),” says Kiplinger.

Some other bonuses, seniors can deduct $15,000 of other taxable income ($30,000 for joint filers) and veterans at least 65 years old can exclude up to $30,000 of income from a military retirement plan.

The only bad news is South Carolina’s sales tax and the fact that counties will impose an annual tax on your motor vehicle value.

6. Colorado

  • State Income Tax Range: 4.55% (flat rate)
  • Average Combined State and Local Sales Tax Rate: 7.65%
  • Median Property Tax Rate: $494 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

The Rocky Mountains are home to the nation’s third-lowest property tax rate. Also, there are several tax exemptions and rebates offered to seniors.

“Residents age 60 and older can also take advantage of a unique property tax “work-off” program, which lets them work for the city or county government to pay off a portion of their property taxes,” says Kiplinger.

Income taxes are also low in Colorado. As of November 2020, a ballot was approved that reduces the state’s flat income tax rate from 4.63% to 4.55%. The only downside to retirement in Colorado is the above national average sales tax.

5. Nevada

  • State Income Tax Range: None
  • Average Combined State and Local Sales Tax Rate: 8.23%
  • Median Property Tax Rate: $533 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

Whether you enjoy gambling or not, the Silver State offers retirees a jackpot in tax savings. There is no state income tax, no estate or inheritance taxes and Nevada has the fourth-lowest median property tax rate in the U.S.
Sales tax is a bit steep, sitting at the 12th-highest in the country. But warm and dry climate makes living in Nevada ideal for seniors.

4. Wyoming

  • State Income Tax Range: None
  • Average Combined State and Local Sales Tax Rate: 5.34%
  • Median Property Tax Rate: $575 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

Kiplinger says that it ranks Wyoming as the #1 most tax-friendly state for middle-class families. So it’s no surprise it ranks highly as a tax-friendly state for retirees, too.

Zero income, estate and inheritance taxes as well as a low state and local sales tax rate of only 5.34%, make the Equality State extremely attractive for retirees.

Wyoming also boasts the 10th-lowest property tax rate in the nation. Plus, eligible seniors can delay payment of up to 50% of their property taxes if they need to.

3. District of Colombia

  • State Income Tax Range: 4% (on taxable income up to $10,000) to 8.95% (on taxable income over $1 million)
  • Average Combined State and Local Sales Tax Rate: 6%
  • Median Property Tax Rate: $564 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

While it may surprise you to see D.C. so high on the list, the tax burden for retirees is not nearly as bad as you think. There’s no tax on Social Security payments and Washington offers a tax credit for property taxes that can make a huge dent in your tax bill.

“The refundable credit is worth up to $1,200 (as a “refundable” credit, if it’s worth more than the tax you owe, the city will send you a refund check for the difference),” says Kiplinger.

For 2020, residents age 70 and older are eligible for the credit if their federal adjusted gross income is $75,900 or less, while the threshold is $55,700 or less for younger residents.

The sales tax in D.C. is also not bad. The city only imposes a 6% tax on purchases and nothing else since there are no “local” taxes to worry about.

The only downside is for wealthier retirees, says Kiplinger. “For 2020, Washington, D.C., estates worth $5,762,400 or more are subject to a city estate tax. The threshold amount drops to $4 million in 2021, which means that even more estates will be hit with the tax after 2020.”

2. Hawaii

  • State Income Tax Range: 1.4% (on taxable income up to $2,400 for single filers; up to $4,800 for joint filers) to 11% (on taxable income over $200,000 for single filers; over $400,000 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 4.44%
  • Median Property Tax Rate: $280 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

Don’t let the Aloha state’s lofty income tax rates (top rate is 11%!) scare you away. Hawaii has one of the lowest average state and local tax rates in the U.S. for retirees.

In addition, Social Security benefits are completely tax-free. Employer contributions to other forms of retirement income are also exempt (e.g., traditional pensions and employer contributions to 401(k) plans), says Kiplinger.

And although real estate prices are high in Hawaii, property tax rates are low. In fact, the statewide median property tax rate is the lowest in the whole country.

Sales tax rates aren’t bad either. But it’s worth noting that most things are taxable in Hawaii — including groceries and clothing — so you end up paying a bit more than the low rate suggests.

1. Delaware

  • State Income Tax Range: 2.2% (on taxable income from $2,001 to $5,000) to 6.6% (on taxable income over $60,000)
  • Average Combined State and Local Sales Tax Rate: 0%
  • Median Property Tax Rate: $562 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

With no sales tax, low property taxes, and no death taxes, it’s easy to see why Delaware takes the top spot for most tax-friendly states to retire in.

Not having to pay any state or local sales tax on in-state purchases means you’ll have more disposable income to enjoy in your golden years.

And because there are no estate or inheritance taxes in Delaware, you can pass along more of your wealth to heirs or charities of your choosing.

The only drawback — and they’re not even that bad — are the income taxes. Kiplinger says, “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. But, in the end, income taxes don’t add enough to a retiree’s overall tax burden to keep the state out of the top spot on our list.”

As you can see, there are several factors that go into choosing the best state to live out your golden years. Everyone’s criteria will be a bit different, but use this list to guide your research.

To a richer life,

To a Richer Life,

The Rich Life Roadmap Team

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