The Best Tax-Friendly States for Retirees

Fact checked by Vikki VelasquezFact checked by Vikki Velasquez

Tax-friendly states for retirees offer tax breaks and incentives specifically designed to benefit individuals living on retirement income. These states may exempt certain types of retirement income from taxation, such as Social Security benefits, pensions, and retirement account withdrawals. Additionally, they may have lower property and sales taxes, as well as other tax advantages for older adults.

Key Takeaways

• Living in tax-friendly states can help retirees stretch their savings further.
• When choosing a tax-friendly state for your retirement, consider factors the income tax rates, property tax rates, sales tax rates, and exemptions for retirement income.
• Research state tax laws, consult with a financial advisor, and learn about the process of changing residency before you relocate for retirement.

Living in a tax-friendly state can help you stretch your retirement savings and make your fixed income go much further. By choosing a state with favorable tax policies, you can potentially reduce your tax burden and have more resources available to support your desired lifestyle during retirement.

Best Tax-Friendly States for Retirees

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming are the top tax-friendly states for retirees. All of them have no personal income taxes. Other taxes, cost of living, and overall quality of life are also important considerations.

Alaska

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 1.04% of property value
• Sales taxes: 1.821%
• Tax burden as % of income: 4.6%
• Cost of living index: 123.0
• Quality of life rank: #45

With no personal income tax, Alaska will not tax any of your retirement or other income, including capital gains. Annual property taxes average 1.04% of the property’s value, putting the state at #21 out of 50. There is no statewide sales tax, but local municipalities average 1.821% making groceries taxable in some locations in the state, which could raise your weekly food bill.

Like most states, Alaska has no inheritance or estate taxes. However, at 123.0 compared to a baseline of 100, the overall cost of living is higher than in some states, and unless you enjoy cold weather, including lots of snow, your quality of life (the state ranks #45 out of 50) may be lower than you like. As far as the overall tax burden is concerned, Alaska stands at 4.6% of income.

Florida

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 0.91% of property value
• Sales taxes. 7.002%
• Tax burden as % of income: 9.1%
• Cost of living index: 102.4
• Quality of life rank: #9

Florida, like Alaska, has no personal income tax. As far as the state is concerned, what you earn is yours to keep—that is, if you’re okay with all of the other costs you will have, including a state-wide average 7.002% sales tax rate and a cost of living that is slightly higher than the national average. At an average of 0.91% of home value, annual property taxes are considered reasonable.

The Sunshine State ranks #9 for quality of life, which is no surprise given the abundance of beaches, attractions, cultural life, and other amenities. The fact that there are no estate or inheritance taxes is yet another reason Florida has long been a retirement haven.

Nevada

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 0.59%
• Sales taxes: 8.236%
• Tax burden as % of income: 9.6%
• Cost of living index: 102.6
• Quality of life rank: #33

Nevada is another state with no personal income tax, so you don’t need to worry about having any of your retirement income taxed on the state level. All income, regardless of source, including capital gains, is tax-free at the state level.

Property taxes in Nevada are low, at only 0.59% of property value. The state has no estate and inheritance taxes, but sales taxes, which average 8.236%, are among the highest in the nation. On the other hand, Nevada does not tax groceries or prescription medications. The overall cost of living is just about average, and quality of life puts the state at #33.

South Dakota

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 1.17%
• Sales taxes: 6.111%
• Tax burden as % of income: 8.4%
• Cost of living index: 91.2
• Quality of life rank: #11

You won’t pay any state income taxes in South Dakota. That’s because there is no personal income tax in the state. This means all income, including capital gains, regular income, and, of course, retirement income, is exempt. The state has no estate or inheritance tax either.

Property taxes are fairly high at 1.17% of value but homeowners age 70 or older are eligible for a homestead exemption that delays collection of those taxes until the home is sold. The average sales tax rate of 6.111% is fairly low but does apply to groceries. The state’s cost of living index is below average at 91.2, and the quality of life rank is #11 out of 50, a great standing for retirees.

Tennessee

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 0.67%
• Sales taxes: 9.548%
• Tax burden as % of income: 7.6%
• Cost of living index: 90.8
• Quality of life rank: #27

In Tennessee, no personal income tax means no tax on retirement income, including capital gains, Social Security, IRA or 401(k) distributions, or even part-time work. The state has no estate or inheritance tax, and property taxes are a very low 0.67% of property value, one of the lowest on this list.

Factoring in a reasonable 90.8 cost of living index and a #27 quality of life ranking, sales tax is the only remaining issue. The average 9.548% sales tax rate sounds bad, but groceries are taxed at just 4%, and prescription drugs are tax-exempt, providing some much-needed relief for retirees.

Texas

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 1.68%
• Sales taxes: 8.200%
• Tax burden as % of income: 8.6%
• Cost of living index: 91.7
• Quality of life rank: #29

Continuing a familiar theme for this list, Texas is another state with no personal income tax. This exempts everything from employment income and all forms of retirement income, including capital gains, from state tax. Texas has no estate or inheritance taxes either.

Property taxes, at 1.68% of property value, are high compared to some states. However, recent legislation expanding homestead exemptions and property tax cuts have mitigated this situation somewhat for retirees. As with Tennessee, the high average sales tax rate of 8.200% is tempered by the fact that groceries and prescription drugs are tax-exempt. In addition, Texas charges no tax on over-the-counter medications. All this combines to create a below-average cost of living index of 91.7 and a quality of life rank of #29 for the Lone Star state.

Wyoming

• Retirement income taxes? No
• Capital gains taxes? No
• Inheritance/estate taxes? No
• Property taxes: 0.56%
• Sales taxes: 5.441%
• Tax burden as % of income: 7.5%
• Cost of living index: 92.8
• Quality of life rank: #12

Wyoming beckons retirees with no tax on personal income, no matter the source. The state also has no estate or inheritance tax, making it attractive if you have a large estate and want to pass most of it along to heirs.

Property taxes are the lowest on this list, at 0.56% of property value. Sales taxes have the same distinction, with a state average of just 5.441%. The cost of living index is a very reasonable 92.8. The state ranks #12 out of 50 when it comes to quality of life.

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Factors to Consider When Choosing a Tax-Friendly State for Retirement

When evaluating the tax-friendliness of a state, you should consider several key factors.

• Retirement income taxes. Seven states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming) do not tax income, no matter the source. This means your Social Security income, pension income, and distributions from a 401(k) or individual retirement account (IRA) are not taxed by the state. Moreover, if you have regular income from a job, part-time or full-time, the state takes none of that, either.
• Capital gains taxes. Most states tax capital gains at the ordinary state income tax rate. Eight states apply a lower rate to long-term capital gains. States with no personal income tax do not charge capital gains taxes, which represent real savings if you have investment income.
• Estate and inheritance taxes. While most states do not impose estate or inheritance taxes, 12 plus the District of Columbia impose estate taxes, and six others impose inheritance taxes.
• Property taxes. High property taxes can significantly impact your cost of living, so choosing a state with lower property taxes can be advantageous.
• Sales taxes. States with lower sales tax rates can make everyday purchases more affordable, providing a financial benefit over time.
• Tax burden as a percentage of income. Beyond tax rates, another way to evaluate a state’s tax friendliness is by taking into account the average of all state and local taxes collected as a percentage of income. In addition to everything already accounted for, this includes excise taxes, license taxes, corporate taxes, and all other miscellaneous taxes.

Note

Maryland is the only state that imposes both an estate tax and an inheritance tax.

Tips for Retirees Planning to Relocate to a Tax-Friendly State

The seven states listed above are some of the most tax-friendly in the country. However, depending on your income sources and lifestyle, your preferred state might not even be on this list. Your personal financial circumstances and a reasonable amount of research can help you fine-tune your final decision. Here are some practical tips and advice for doing this.

1. Research State Tax Laws: Thoroughly research the tax laws of several states you are considering relocating to. In particular, consider income tax rates, property tax rates, and any specific tax breaks for retirees as they relate to your particular sources of income and lifestyle needs.

2. Consult with a Financial Advisor: It’s important to consult with a trusted financial advisor who specializes in retirement planning and taxation. Your advisor can help you understand the financial implications of relocating and offer personalized advice based on your specific situation.

3. Consider Overall Cost of Living: While state taxes are an important consideration, don’t overlook other aspects that factor into the cost of living in your potential new location. Compare housing costs, healthcare expenses, and everyday expenses to get a comprehensive picture of the financial impact of relocating.

4. Plan for Social and Community Factors: Beyond financial considerations, think about the social and community aspects of relocating. Consider factors such as access to healthcare, proximity to family and friends, and recreational activities that are important to you.

What Are the Benefits of Living in Tax-Friendly States for Retirees?

Living in tax-friendly states can have several benefits. Some of the advantages include:

1. Lower Tax Burden: Tax-friendly states typically offer lower or no state income taxes, and they may also exempt retirement income, pensions, and Social Security benefits from taxation. This can result in more disposable income for retirees.

2. Affordable Living: Tax-friendly states often, but not always, have a lower overall cost of living, including lower property taxes and housing costs, which can make it more affordable for retirees to maintain their lifestyle.

3. Access to Amenities: Many tax-friendly states offer a high quality of life with access to amenities such as beaches, cultural attractions, outdoor recreational activities, and healthcare facilities.

4. Financial Stability: Retirees living in tax-friendly states may experience greater financial stability due to the potential savings from lower taxes and living expenses, allowing them to stretch their retirement savings further.

5. Estate Planning Benefits: Most tax-friendly states offer favorable estate or inheritance tax laws, which can benefit retirees who want to pass on their assets to their heirs.

What State Has the Lowest Tax Burden for Retirees?

Alaska, with no state taxes on income of any form, low sales taxes, and no estate or inheritance taxes, ranks the lowest when it comes to total tax burden. However, high property taxes, an above-average cost of living, and a low quality of life ranking don’t necessarily translate to an ideal retirement location. For retirees who prefer the climate and the lowest possible overall tax burden, though, Alaska is the one.

What State Has the Lowest Cost of Living for Retirees?

West Virginia has the lowest cost of living of any state in the U.S. Oklahoma, Kansas, Alabama, and Mississippi round out the five states with the lowest cost of living index at the end of Q2 2024, based on data from a survey conducted by the Missouri Economic Research & Information Center.

How Do Income Tax Rates Vary Among Tax-Friendly States for Retirees?

Some states have no state income tax at all, while others offer exemptions for retirement income, pensions, and Social Security benefits. This can result in a lower tax burden and more disposable income for retirees. It’s important to research and compare the specific income tax rates and exemptions offered by different tax-friendly states to find the best option based on your individual financial circumstances, income sources, and retirement plans.

What Factors, Besides Taxes, Should Retirees Consider When Choosing a State for Retirement?

When choosing where to live in retirement, you should consider the overall cost of living, including housing, healthcare, and everyday expenses. Access to quality recreational and cultural opportunities can also be an important consideration. Furthermore, proximity to family and friends, as well as the climate and general lifestyle offered by the state, should be taken into account. It’s essential to evaluate all of these factors and consider how they align with individual preferences and needs for a fulfilling retirement.

The Bottom Line

The most tax-friendly states have no personal income taxes, low property and sales taxes, and an overall low tax burden. If the state also exempts estate and inheritance taxes, which most do, that’s another plus.

When deciding where to live in retirement, you should consider much more than taxes. In addition to how your income fits into a given state’s tax laws, you should consider the cost of living and quality of life to ensure this state is not only cost-effective but also good for you, long-term. The Internal Revenue Service (IRS) provides extensive tax information for older adults and retirees. Consult with a trusted financial advisor before deciding where to retire to make sure your means are sufficient.

Read the original article on Investopedia.