10 Most Tax-Friendly States for Retirees

Kiplinger: 10 Most Tax-Friendly States for Retirees

Deciding where to live in retirement involves important decisions about climate, cost of living, proximity to friends and family, and an ideal location to enjoy favorite activities. State and local taxes play a critical role, too, because they can increase or decrease the amount of spendable income you'll have to enjoy life in retirement.

These ten states impose some of the lowest taxes on retirees in the U.S., according to Kiplinger's analysis of state tax rules plus research by the Tax Foundation, a nonprofit organization in Washington, D.C., and CCH, a leading provider of tax information and software. We give special preference to states that offer tax incentives to attract retirees.

All of these tax havens exempt Social Security benefits from taxation (and some impose no state income tax at all). Many of them exclude government and military pensions from income taxes, and some exempt private pensions, too. A few offer blanket exclusions up to a specific dollar amount of retirement income from a wide variety of sources, which is important if you depend on distributions from IRAs and 401(k) plans rather than traditional pensions. Review all of your sources of income before you decide which state may be the best fit for your retirement home.

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More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.

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10 Most Tax-Frie... Deciding where to live in retirement involves important decisions about climate, cost of living, proximity to friends and family, and an ideal location to enjoy favorite activities. State and local taxes play a critical role, too, because they can increase or decrease the amount of spendable income you'll have to enjoy life in retirement.

These ten states impose some of the lowest taxes on retirees in the U.S., according to Kiplinger's analysis of state tax rules plus research by the Tax Foundation, a nonprofit organization in Washington, D.C., and CCH, a leading provider of tax information and software. We give special preference to states that offer tax incentives to attract retirees.

All of these tax havens exempt Social Security benefits from taxation (and some impose no state income tax at all). Many of them exclude government and military pensions from income taxes, and some exempt private pensions, too. A few offer blanket exclusions up to a specific dollar amount of retirement income from a wide variety of sources, which is important if you depend on distributions from IRAs and 401(k) plans rather than traditional pensions. Review all of your sources of income before you decide which state may be the best fit for your retirement home.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
10. Pennsylvania State Income Tax: Flat rate of 3.07%

State Sales Tax: 6%

Estate Tax/Inheritance Tax: No/Yes

Pennsylvania is one of only two states (Mississippi is the other) that exempts all retirement income -- including public and private pensions, IRAs and 401(k) distributions -- from its state income tax. Non-retirement income is taxed at a low, flat rate of 3.07%. Food, clothing and medicine are exempt from state sales taxes. But property taxes can be high in the Keystone State, especially near larger cities. One caveat for the wealthy: Your heirs won't get off so easily. Pennsylvania is one of a handful of states to have an inheritance tax, paid by the heirs.

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More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
9. Delaware State Income Tax: 2.2% to 6.75%

State Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No

The First State is number one with many retirees, thanks to low real estate taxes, modest income taxes and no sales taxes. In fact, its highway billboards welcome visitors to the "home of tax-free shopping." Social Security benefits are exempt from income taxes, and 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. Income tax rates on remaining income range from 2.2% to 6.75%, with the top rate kicking in for both individuals and married couples when income reaches $60,000. Residents 65 and older who do not itemize their deductions are eligible for an additional standard deduction of $2,500. Real estate taxes vary by county but are generally low, and homeowners 65 and older qualify for a credit against school taxes of up to $500.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
8. Louisiana State Income Tax: 2% to 6%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: None/None

For retirees, every day is like Mardi Gras in Louisiana. Social Security and military, civil service, and state and local government pensions are exempt from state income taxes, plus up to $6,000 per person of pension and annuity income. Personal income tax rates max out at 6% on taxable income over $50,000. Property taxes are among the lowest in the nation, according to the Tax Foundation. Assessments are based on 10% of the fair market value. Homeowners receive a homestead exemption of $7,500 of their home's assessed value, and homeowners 65 and older may qualify for a freeze on the value of their home. But sales taxes can be steep. The statewide sales tax is 4%, and local parishes and jurisdictions within those parishes can add their own sales taxes. Louisiana's average combined sales tax rate of 8.86% ranks third-highest in the nation, according to the Tax Foundation. But food and drugs are exempt from sales taxes throughout the state.

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More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
7. South Carolin... State Income Tax: 3% to 7%

State Sales Tax: 6%

Estate Tax/Inheritance Tax: None/None

South Carolina extends its Southern hospitality to retirees. The Palmetto State exempts Social Security benefits from state income taxes, and it allows residents who are 65 and older to deduct up to $15,000 per person ($30,000 per couple) of retirement income, regardless of the source. Younger retirees can deduct up to $3,000 of retirement income, including public and private pensions and IRA distributions, from their taxable income. Property taxes are very low. Taxes are based on 4% of the market value of a home, and homeowners 65 and older qualify for a $50,000 homestead exemption. Senior homeowners are also exempt from school taxes on their properties. But sales taxes can be high. The statewide rate is 6%, plus localities can levy an additional tax of up to 3%. Prescription drugs are exempt, but food is not.

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More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
6. Alabama State Income Tax: 2% to 5%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: None/None

Alabama is a tax haven for retirees. Social Security benefits, as well as military, public and private pensions, are excluded from state income taxes (but IRAs and distributions from 401(k)s and similar defined-contribution retirement plans are not exempt). Remaining income is taxed as high as 5%, the maximum rate that kicks in when taxable income tops $3,000. Alabama also has some of the lowest property taxes in the U.S. Homeowners 65 and older are exempt from state property taxes, but some cities assess their own property taxes. The only downside is sales taxes. The statewide rate is just 4%, but cities and counties in the Yellowhammer State can impose their own levies. Together, the combined sales tax can add up to a whopping 10% -- among the highest in the nation. Food is taxed, but prescription drugs are not.

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More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
5. Georgia State Income Tax: 1% to 6%

State Sales Tax: 4%

Estate Tax/Inheritance Tax: None/None

Georgia is doing its part to attract retirees to the Peach State with a sizable exemption for income taxes on retirement income. Taxpayers ages 62 to 64 can exclude up to $35,000 per person from state income taxes for a total of $70,000 per couple. Georgia residents who are 65 and older can exclude up to $65,000 of retirement income (or $130,000 per couple) from state income taxes in 2012. Retirement income is broadly defined as interest, dividends, capital gains, net income from rental property, pensions, annuities and up to $4,000 of earned income. Non-retirement income is taxed at a rate as high as 6%. The statewide sales tax is 4%, but local jurisdictions can add up to 4% of their own taxes. Food and prescription drugs are exempt. Property-tax rates are close to the national average, but higher than in many neighboring southern states.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
4. Mississippi State Income Tax: 3% to 5%

State Sales Tax: 7%

Estate Tax/Inheritance Tax: None/None

Mississippi turns on its Southern charm for retirees. It not only exempts Social Security benefits from state income taxes, but it is one of only two states that excludes all qualified retirement income -- including pensions, annuities, IRAs and 401(k) distributions -- from state income taxes. Non-retirement income is taxed at a maximum 5%. Property taxes in the low-cost Magnolia State are below the national average, according to the annual 50-state property-tax comparison study conducted by the Minnesota Taxpayers Association. Single-family homes are taxed at just 10% of assessed value, and statewide, property taxes average about $1,070 per $100,000 of a home's market value, according to Kiplinger's calculations. In addition, for residents 65 and older, the first $75,000 of property value is exempt from taxes.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
3. Wyoming State Income Tax: None

State Sales Tax: 4%

Estate Tax/Inheritance Tax: None/None

Thanks to the abundant revenues Wyoming collects from oil and mineral companies, residents of the Equality State don't have to fork over much of their income to taxes. There is no state income tax, so you'll pay nothing on your Social Security benefits, pension or IRA distributions. The state sales tax is 4%, and counties can add up to 2% in additional levies. Still, Wyoming has one of the lowest combined sales tax rates in the U.S., and prescription drugs and groceries are exempt. For most residential property, only 9.5% of market value is subject to tax. With a top property-tax rate of 80 cents per $100 in most cities and towns in Wyoming, annual property tax is just $760 per $100,000 of a home's market value.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
2. Nevada State Income Tax: None

State Sales Tax: 6.85%

Estate Tax/Inheritance Tax: None/None

Nevada is a good bet for retirees because it shifts much of its tax burden to out-of-state tourists and gamblers. The Silver State has no income tax, so your Social Security benefits, pension, IRA distributions and even income from a part-time job won't be taxed. Property taxes, which are assessed on 35% of a home's appraised value, are reasonable and typically run about $1,050 per year for a $100,000 house. But sales taxes, which can top 8% in some areas, are higher than average. Overall, Nevada has the second-lowest combined state and local tax burden in the nation, according to the Tax Foundation.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
1. Alaska State Income Tax: None

State Sales Tax: None

Estate Tax/Inheritance Tax: None/None

Alaska is a true tax haven for retirees -- if you don't mind the cold weather and you enjoy rugged outdoor beauty. In addition to enjoying no state income tax, Alaska residents benefit from the cold, hard cash of an annual dividend ($1,174 for 2011) from the state's oil reserves that is distributed to every permanent resident who has lived there for at least one year. There is no statewide sales tax. But some localities impose a sales tax, at an average of less than 2%. Alaska real estate taxes and home prices can be high, but homeowners 65 and older are exempt from municipal taxes on the first $150,000 of the assessed value of their home. "Alaskans are consistently the least taxed residents in the nation," according to the Tax Foundation.

(iStock)

More From Kiplinger:
Kiplinger’s State-by-State Guide to Retiree Taxes
10 Things You Must Know About Social Security
12 Smart Year-End Tax Moves for 2012

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
More from Kiplin... Click here to see the least tax-friendly states for retirees.