Retirement dreams often come up against the harsh reality of finances, and tax burdens are one of those realities. If your retirement plans include a relocation, and if you want to minimize your tax burden, then this article from Kiplinger’s Personal Finance, “10 Most Tax-Friendly States for Retirees, 2018,” deserves your careful consideration.
Most of the states listed below exempt at least part of retirement income, like pensions and withdrawals from tax-deferred retirement plans. They also have low property taxes, which matters more now that the Tax Cuts and Jobs Act limits the amount that can be deducted in state and local taxes on federal returns to $10,000 a year.
10. Georgia. The Peach State’s low tax climate is attracting retirees by the bushel. How’s this sound: Not only is Social Security exempt from state taxes, so is up to $35,000 of most types of retirement income for those age 62-64. For those 65 and older, the exemption is $65,000 per taxpayer, or $130,000 per couple. There’s no state estate tax and no inheritance tax.
9. Kentucky. The Bluegrass State’s riding high with an exemption for Social Security taxes, plus up to $31,110 per person for a wide variety of retirement income. There is an additional exclusion for qualified military, civil service and state and local government pensions. Kentucky also has a homestead exemption on the assessed value of a qualifying single-unit property, which is assessed every two years, according to the cost-of-living index.
8. New Hampshire. The Granite State rocks taxes: there’s no state income tax, no estate or inheritance tax and no taxes on Social Security benefits. There’s also no sales tax. There is a 5% tax on dividend interest, but a $1,200 exemption is available for residents 65 or older.
7. Nevada. Hit the tax jackpot in this state. There are no taxes on groceries and the average combined state and local sales tax rate is 8.14%. No state income tax, no estate tax, no inheritance tax. You can cash in your retirement funds—tax free.
6. Pennsylvania. The Keystone State exempts most retirement income from state taxes. Social Security benefits, public and private pensions and distributions from 401(k) and IRA plans are tax free. There are often high local income taxes, but they only apply to earned income. However, there is a state inheritance tax, calculated as a percentage of the value of the estate transferred to beneficiaries and there are different rates depending on the relationship of the heir to the decedent and the decedent’s date of death.
5. Florida. The Sunshine State is chock full of retirees who come for the climate and enjoy the state’s tax policies. There are no state income taxes, no estate tax and no inheritance tax. The average combined state and local tax rate is 6.8%.
4. Mississippi. The Magnolia state’s tax policies are in full flower, with no state income tax on Social Security benefits, IRA and 401(k) plan withdrawals, income from public and private pensions and other types of qualified retirement income. Starting in 2019, the first $1,000 of taxable income is except from the 3% rate, and by 2022, the first $5,000 will be except.
3. South Dakota. No state income tax, no estate tax and no inheritance tax make the Mount Rushmore state a friendly place for retirees. Social Security benefits and other retirement income enjoys a tax-free ride. Sales taxes are low, but most everything is taxed, including groceries, non-prescription drugs and many services. South Dakota started collecting tax from out-of-state retailers late this year.
2. Wyoming. Abundant tax revenue from oil and mineral rights makes Wyoming one of the lowest taxed states in the nation. There’s no income tax, sales taxes are low and the median property tax on the median home value of $199,000 is $1,223, the ninth-lowest in the country.
1. Alaska. Okay, we know that not many readers are packing up to move to this rugged state. However, if you did, you’d enjoy no state income tax, so everything from Social Security benefits to retirement account withdrawals to investment gains are tax free. There’s no state sales tax, and in Anchorage and Fairbanks, there are no local sales taxes. Once you’ve established residency for at least a year, you get a dividend check from the state’s oil wealth savings accounts.
Each state listed here comes with a tradeoff. In Nevada, you have to be willing to live with extreme temperatures, while in Alaska, you may not get to see friends and family often. However, if taxes are a concern, now you know some of your options.
Reference: Kiplinger’s Personal Finance (Nov. 29, 2018) “10 Most Tax-Friendly States for Retirees, 2018”