Title: Unveiled: 13 States Exempt from Taxing Retirement Incomes
Retiring individuals often fret about taxes, and rightfully so, given their tendency to rise frequently. These folks, living on fixed or limited incomes, may even consider relocating due to tax concerns. If you want to avoid potential tax headaches in your golden years, it's essential to familiarize yourself with the tax environment in your current residence and plan accordingly. Bear in mind that different retirement income sources may be taxed differently, including pensions, Social Security, annuities, and retirement account withdrawals.
Let's dive into how various states treat retirement income taxation:
The 9 Tax-Friendly States: No Income Tax
Lucky residers of the following states enjoy tax-free income due to the absence of income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Although these states are tax-exempt, there are a few minor exceptions. For instance, Washington includes a state capital gains tax for high earners and New Hampshire applies a temporary 3% tax on dividends and interest on investment income, which will be phased out by 2025.
The 4 State Runners-Up: No Retirement Income Tax
If these tax-free states don't fit your criteria, you may find the following states appealing, despite their income taxes, as they exclude retirement income from their taxes:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
The Friendly 41: No Social Security Tax
The 41 states that waive taxes on Social Security benefits include:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Wisconsin
- Washington
- Washington, D.C.
- Wyoming
The Burden-Bearing Nine: Social Security Taxation
The nine states that tax Social Security benefits to some extent include:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
However, for most citizens of these states, the tax burden on Social Security benefits is minimal, as income or age thresholds largely mitigate the impact.
Keeping Taxes in Perspective
Before panicking about taxes in retirement, remember that individual state taxes are just one piece of the puzzle. Additional sources of revenue, such as property taxes, sales taxes, or other means, may still apply. Taking a broad perspective on your state's tax environment will help you make an informed decision about your retirement plans.
[1] Bankrate.com, State taxation of retirement income: What to know before you retire, https://www.bankrate.com/retirement/state-taxes/[2] AARP, Which States Don't Tax Pensions and Retirement Income? https://www.aarp.org/retirement/planning-for-retirement/info-2020/states-that-dont-tax-pensions-retirement.html[3] Kiplinger, 52 Places to Go in 2021, https://www.kiplinger.com/slideshow/travel/T009-S001-52-places-to-go-in-2021/index.html[4] Investopedia, State Retirement Tax Breaks, https://www.investopedia.com/terms/s/state-retirement-tax-breaks.asp[5] SmartAsset, 50 states compared: Where is it best to retire? https://smartasset.com/retirement/states-with-the-best-taxes-for-retirees
In the process of planning for tax-free retirement, individuals may consider residing in states like Alaska, Florida, Nevada, and others, as they offer tax exemptions for retirement income due to the absence of income tax. even though some minor exceptions exist in Washington and New Hampshire.
Furthermore, those not attracted to tax-exempt states can also explore options such as Illinois, Iowa, Mississippi, and Pennsylvania, which exclude retirement income from their taxes, despite having income taxes.
