Places to Retire with Low Income Taxes

low_tax_retirementIf you are thinking about places to live when you retire, you also have to think about income taxes. You don’t have much control over your federal income tax burden but you can control your state tax burden by choosing your retirement state wisely. Finding a state with low taxes for retirees is not as straightforward as it may seem. Let’s take a look.

States with No Income Taxes on Retirement Income

This part is easy, sort of.  There are a handful of states that have no income tax at all, for retirees or for working folks. Those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Two other states—New Hampshire and Tennessee—tax dividend and interest income that exceeds certain income limits. This tax would be relevant for retirees who use quite a bit of dividend or interest income to live on.

Of course, you can never be certain that the tax environment won’t change in any of these states. Alaska is probably tax-safe because of its substantial oil revenues. Other states with no income tax may require constitutional amendments to impose a new tax. That’s hard to do in today’s political climate. It would be particularly hard to create a new state income tax and apply it to retirees because of their voting power.

States with Special Retirement Tax Benefits

Pension income is often taxed differently in many states. Most states that have an income tax exempt at least some pension income from taxation. However, these same states may tax public and private pensions differently.

As examples, Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania exclude all federal, military and in-state government pensions from taxation. Yet Kansas taxes public pensions from all other states. That’s important information to know.

Pennsylvania and Mississippi exempt all retirement income (including distributions from IRAs and 401(k) plans) from state income taxes. That’s a fabulous benefit to retirees.

Other states offer special tax breaks based on age or income. As one example, New Jersey allows its residents who are 62 and older and who have incomes less than $100k to exclude up to $20,000 of private pension income from taxes.

New York state allows residents who are 59½ and older to exclude up to $20,000 of private or out-of-state public pensions from taxes. This exclusion applies regardless of their total retirement income.

Michigan residents can exclude up to $43,440 of private pension income from state taxes in 2009. This exclusion doubles for married couples.

High Tax Retirement States to Avoid

According to my research, there are at least three states you should avoid as a retirement destination if high income taxes are a concern.

The worst states tax 100% of most pension and other retirement income. Making things worse is that their marginal tax brackets are at the high end of the scale.  These states are California (9.55% tax rate on income less than $1 million), Rhode Island (9.9% tax rate) and Vermont (9.5% tax rate).

Connecticut and Nebraska also tax all retirement income, with top tax brackets of 5% and 6.84%, respectively. Not great either. I wouldn’t be moving to any of these states to retire.

In addition to income tax burdens, many retirees also have to be concerned with property taxes. For more information about those burdens, read my post on retirement tax burdens.

If you want to see a map showing relative tax burdens on retirees, Kiplinger’s has one for you.


Comments

  1. Mr. Libris Fidelis says

    You did not mention that by Congressional law, military pensions are tax-exempt to ALL US states and possessions. I tried filing a tax return in Missouri and was informed of this federal law. Department of Veterans Affairs confirmed that veterans’ pensions are tax exempt in every state.

    • Kenneth Vaughn says

      There is no federal law making military pensions tax exempt. Military pay is taxable by individual states according to each states laws not the federal governments.

      • Mr. Libris Fidelis says

        I don’t know where you get your mis-information from, but it is by Congressional laws that US veterans pensions are TAX EXEMPT at EVERY level of government, from community to state to federal levels! It has been that way for decades!!!

    • Mike Speciale says

      States decide whether or not to tax military pensions on their own. There is no federal law regarding this, and it would be unconstitutional if there were. North Caroling does not tax my military pension, but new retirees will be taxed, due to a lawsuit a few years ago where the State lost because they were taxing military pensions but not state pensions. Those that were already retired by a certain date were then made exempt from State taxes, but all retirees after that date will be taxed.

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