This article originally appeared on kiplinger.com.
If you’re thinking of moving to a different state in retirement, you’ll want to consider climate, proximity to family and friends, access to quality health care, and a host of other important factors before picking a new location. But make sure you add taxes in the new state to the list of considerations. The total state and local tax burden in one place can be thousands of dollars more per year than in another. That can make a huge difference when you’re trying to stretch out your retirement savings.
To do a head-to-head, multistate comparison of state taxes on retirees, you can use Kiplinger’s State-by-State Guide to Taxes on Retirees. But if you’re just looking for the 10 states that impose the lowest taxes on retirees, check out the list below. Our results are based on the estimated state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, traditional and Roth IRAs, private pensions, 401(k) plans, interest, dividends, and capital gains. One couple had $50,000 in total income and a $250,000 home, while the other had $100,000 of income and a $350,000 home.
All but one of the states on our “most tax-friendly” list completely exempt Social Security benefits from state income taxes. Most also allowed an exemption for at least a portion of our hypothetical couples’ other retirement income, such as private pensions or IRA withdrawals. They tend to have low property tax rates and/or reasonable sales tax rates, too. Take a look and see for yourself. We list the most tax-friendly state for retirees last.
10. Tennessee
State Income Tax Range: 1% on interest and dividends
Average Combines State and Local Sales Tax Rate: 9.55%
Median Property Tax Rate: $636 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
Residents of the Volunteer State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans. That’s because there’s no broad-based income tax in Tennessee—only interest and dividends are subject to the state’s limited income tax. Plus, anyone 65 years of age or older with total annual income of $37,000 or less ($68,000 or less for joint filers) is completely exempt from the 1% tax. It’s also waived if you’re at least 100 years old. On top of all that, the tax is being phased out at a rate of 1% per year. So it will be completely eliminated by 2021.
There are also no estate or inheritance taxes in Tennessee. That will put your heirs at ease.
Property taxes in Tennessee aren’t too bad, either. For instance, our hypothetical couple with a $250,000 home in the state would pay about $1,590 per year in property taxes ($2,226 for the couple with a $350,000 home). That’s well below the national average. There are also property tax relief programs in the state offering property tax reimbursements to income-eligible senior citizens. Tennessee also has a property tax freeze program for homeowners age 65 and older.
Watch out for Tennessee’s sales tax, though. The state’s 9.55% average combined state and local sales tax rate is the highest in the country. Tennessee is also one of the few states where groceries are subject to sales tax—they’re taxed at a 4% rate by the state (additional local taxes may also apply).
9. Arkansas
State Income Tax Range: 0.75% (on taxable income up to $4,499 for taxpayers with net income from $22,200 to $79,300) to 6.6% (on taxable income over $79,300 for taxpayers with net income above $79,300)
Average Combines State and Local Sales Tax Rate: 9.51%
Median Property Tax Rate: $612 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
Arkansas usually isn’t one of the places you automatically think of as a retirement destination...but maybe it should be. At least from a tax standpoint, the Natural State has a lot to offer retirees. Let’s start with the state’s income tax rates—which are structured in a way that favors retirees with lower incomes (and the top rate for top earners is going down to from 6.6% to 5.9% in 2021). Social Security benefits are tax-free, and the state allows a broad-based exemption of up to $6,000 for other types of retirement income.
Another plus: Low property taxes. At only $612 per year, Arkansas’ median property tax rate is well below the national average ($250,000 home = $1,530 in tax; $350,000 home = $2,142 in tax). Plus, seniors in the state can have their property taxes “frozen” and annual increases are limited. There are no estate or inheritance taxes in Arkansas, either.
The state’s Achilles heel is its sales tax. The statewide sales tax is 6.5%, and local jurisdictions can add up to 5.125% of their own taxes. When you add it all up, Arkansas has the second-highest average combined state and local tax rate in the country.
8. Arizona
State Income Tax Range: 2.59% (on taxable income up to $27,272 for single filers; up to $54,544 for joint filers) to 4.5% (on taxable income over $163,632 for single filers; over $327,263 for joint filers)
Average Combines State and Local Sales Tax Rate: 8.4%
Median Property Tax Rate: $617 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
The Grand Canyon State exempts Social Security benefits from state income taxes, plus up to $2,500 of income from federal and Arizona government retirement plans. Up to $3,500 of military retirement income is also tax-free in Arizona. Income tax rates are relatively low, too. (Although, starting in 2021, the state will impose a 3.5% surtax on taxable income over $500,000 for joint filers and over $250,000 for single taxpayers.)
The estimated property tax on our first hypothetical retired couple’s $250,000 home in Arizona is only $1,543 per year. For our second couple’s $350,000 residence, the estimated annual tax is only $2,160. Both those amounts are significantly below the national average. In addition, homeowners age 65 and older can “freeze” the value of their property for real estate tax purposes for three years if they lived in the home for at least two years and their annual income is below $37,584 (one owner) or $46,980 (multiple owners). Other property tax breaks are available for seniors, too.
Sales taxes in Arizona are above average, though. The average combined (state and local) rate is 8.4%, which is the 11th-highest in the nation. However, Arizona does not have an estate or inheritance tax, which makes it a more attractive retirement destination for wealthier seniors.
7. South Carolina
State Income Tax Range: 3% (on taxable income from $3,070 to $6,150) to 7% (on taxable income over $15,400)
Average Combines State and Local Sales Tax Rate: 7.46%
Median Property Tax Rate: $545 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
The Palmetto State extends some real southern hospitality to retirees by offering a charming collection of income tax breaks. To start, Social Security benefits are completely exempt. In addition, taxpayers age 65 or older can exclude up to $10,000 of retirement income (up to $3,000 for taxpayers under 65). Seniors can also deduct $15,000 of other taxable income ($30,000 for joint filers). Plus, veterans who are at least 65 years old can exclude up to $30,000 of income from a military retirement plan (up to $17,500 for veterans under 65).
Low property tax rates in South Carolina help retirees, too. The statewide average property tax on a $250,000 home in the state is only $1,363. It’s only $1,908 for a $350,000 residence. Those amounts are the sixth-lowest in the country for houses at those price points. Seniors can also claim a homestead exemption for the first $50,000 of their property’s fair market value. To qualify, you must have been at least 65 years old and a legal resident of South Carolina for one year, as of July 15 the year the exemption is claimed.
The lack of an estate or inheritance tax also makes South Carolina a desirable location for wealthy seniors.
There is some bad news, though. Sales taxes are on the high end in South Carolina. There’s a 6% statewide levy, and local governments can add as much as 3%. The average combined rate is 7.46%, which is well above average. Counties also impose an annual tax on your motor vehicle’s value.
6. Colorado
State Income Tax Range: 4.55% (flat rate)
Average Combined State and Local Sales Tax Rate: 7.72%
Median Property Tax Rate: $494 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
Many retirees in Colorado feel a Rocky Mountain high when they see their low property tax bill. The state’s median property tax rate is the third-lowest in the nation. For our hypothetical retired couple with a $250,000 house, that comes to an estimated $1,235 annual property tax bill. It’s only $1,729 per year for our other couple’s $350,000 residence. Property tax exemptions, rebates and deferrals are also available for qualified seniors. Residents age 60 and older can also take advantage of a unique property tax “work-off” program, which lets them work for the city or county government to pay off a portion of their property taxes.
Income taxes are reasonable in the Centennial State, too. Colorado voters approved a measure on the November 2020 ballot that reduces the state’s flat income tax rate from 4.63% to 4.55%. The state also limits the how much its revenue can grow from year-to-year by lowering the tax rate if revenue growth is too high.
Wealthier retirees will also appreciate the fact that Colorado doesn’t impose an estate or inheritance tax. So, more of your money can be passed on to your family when you die.
Sales taxes will bring retirees back down to earth, though. Although the state sales tax rate is low—only 2.9%—local governments can tack on as much as 8.3%. As a result, the combined state and local sales tax rate is above the national average.
5. Nevada
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 8.23%
Median Property Tax Rate: $533 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
Nevada is a good place to spend your golden years if you don’t want to gamble with your retirement savings. That’s because the Silver State offers retirees a jackpot of tax savings. There is no state income tax, so you can cash in your retirement plans and collect your Social Security checks without worrying about a big state tax bill. There are no estate or inheritance taxes in Nevada, either.
Nevada also has the fourth-lowest median property tax rate in the U.S. So, if our first make-believe couple retired to Nevada and bought a $250,000 home, they should expect to pay around $1,333 per year in property taxes on the residence. For our second imaginary couple, they would only pay about $1,866 annually on their $350,000 home. Unfortunately, however, Nevada doesn’t offer any special property tax breaks for seniors.
Sales tax is one area where Nevada could do better. The state imposes a 6.85% tax, and counties may tack on up to 1.53% more. As a result, the average combined state and local sales tax rate is 8.23% (that’s the 12th-highest combined rate in the country).
4. Wyoming
State Income Tax Range: None
Average Combined State and Local Sales Tax Rate: 5.33%
Median Property Tax Rate: $575 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
The Equality State is #1 in our rankings for the most tax-friendly state for middle-class families. So it should be no surprise that Wyoming is a tax-friendly place for retirees, too. The favorable tax climate for seniors starts with zero income, estate or inheritance taxes.
Sales taxes are low in Wyoming, too. The average combined state and local sales tax rate is only 5.33%, which is the eighth-lowest combined sales tax rate in the country.
You won’t pay high property taxes to own a home on the range, either. For a $250,000 home in Wyoming, the statewide average annual property tax bill comes to just $1,438. It’s only $2,013 for a $350,000 home. Those amounts are tied for the 10th-lowest tax totals in the nation for each price point. Plus, in tough times like these, it’s also good to know that eligible seniors in Wyoming can delay payment of up to 50% of their property taxes if money gets tight in retirement.
3. District of Columbia
State Income Tax Range: 4% (on taxable income up to $10,000) to 8.95% (on taxable income over $1 million)
Average Combined State and Local Sales Tax Rate: 6%
Median Property Tax Rate: $564 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: Estate Tax
Although the general cost of living in Washington, D.C., is high, the average tax burden for retirees isn’t. When it comes to income taxes, there are two keys to a lower tax bill. First, how much of your income is from Social Security benefits is an important factor. That’s because the city doesn’t tax Social Security payments, but it does tax most other common forms of retirement income, such as pensions, 401(k) funds, and IRA withdrawals. Second, qualifying for the city’s income tax credit for property taxes paid can make a huge difference in the amount of tax you owe. The refundable credit is worth up to $1,200 (as a “refundable” credit, if it’s worth more than the tax you owe, the city will send you a refund check for the difference). Plus, certain seniors have a higher income threshold for claiming the credit. For 2020, residents age 70 and older are eligible for the credit if their federal adjusted gross income is $75,900 or less, while the threshold is $55,700 or less for younger residents.
Shoppers don’t get hit too hard with taxes in the District of Columbia, either. The city imposes a 6% tax on purchases...but that’s it. There are no extra “local” taxes to worry about. As a result, the overall sales tax rate in D.C. is well below the national average when both state and local taxes are considered.
Property taxes are low in D.C., too. The District’s median property tax rate is the eighth-lowest when compared with comparable data from all 50 states. For our hypothetical retired couples, their estimated annual property tax bills in D.C. would be $1,410 ($250,000 home) and $1,974 ($350,000 home). Plus, homeowners 65 and older may qualify for a 50% property tax reduction or deferral of property tax payments.
Here’s one important downside for wealthier retirees: For 2021, Washington, D.C., estates worth $4 million or more are subject to a city estate tax.
2. Hawaii
State Income Tax Range: 1.4% (on taxable income up to $2,400 for single filers; up to $4,800 for joint filers) to 11% (on taxable income over $200,000 for single filers; over $400,000 for joint filers)
Average Combined State and Local Sales Tax Rate: 4.44%
Median Property Tax Rate: $280 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: Estate Tax
If your dream is to retire to a tropical island paradise, don’t let taxes get in the way. Hawaii has one of the lowest average state and local tax burdens in the U.S. Higher-income seniors may get caught in the Aloha State’s lofty income tax rates (the top rate is a whopping 11%), but most retirees won’t pay nearly that much. (Hawaii actually has 11 income tax rates below 11%.) Social Security benefits are completely tax-free. Employer contributions to other forms of retirement income are also exempt (e.g., traditional pensions and employer contributions to 401(k) plans).
Although housing prices are high in Hawaii, property tax rates are really low. In fact, the statewide median property tax rate is the lowest in the whole country (and by a pretty good margin). If our hypothetical retire couples moved to Hawaii, their estimated annual property tax bills would be only $700 ($250,000 home) and $980 ($350,000 home). Depending on where in Hawaii they live, senior could also qualify for some additional property tax relief.
Sales tax rates are low, too. The state imposes a 4% tax, but localities can add as much as 0.5%. The average combined state and local rate is only 4.44%, which is the seventh-lowest rate in the nation. Most things are taxable in Hawaii—including groceries and clothing—so residents typically end up paying more than the low rate suggests.
Hawaii also imposes an estate tax on estates worth $5.49 million or more. Tax rates range from 10% to 20%.
1. Delaware
State Income Tax Range: 2.2% (on taxable income from $2,001 to $5,000) to 6.6% (on taxable income over $60,000)
Average Combined State and Local Sales Tax Rate: 0%
Median Property Tax Rate: $562 per $100,000 of assessed home value
Estate Tax or Inheritance Tax: None
Congratulations, Delaware – you’re the most tax-friendly state for retirees! With no sales tax, low property taxes, and no death taxes, it’s easy to see why Delaware is a tax haven for retirees. For beginners, you’ll have more disposable income in your golden years if you live in the First State, because you’ll pay zero state or local sales tax on your in-state purchases (Delaware is one of only a handful of states with no sales tax).
You’ll also have more money to spend on the grandkids because property taxes are so low. The estimated annual property tax bill in Delaware for our first make-believe retired couple is just $1,405 on their $250,000 home. It’s just $1,967 for our second imaginary couple’s $350,000 home in the state. Those property tax totals are the seventh-lowest amounts in the nation for homes at those prices. So, our make-believe retired couples will be quite happy in the state. Plus, some Delaware seniors qualify for a school property tax credit of up to $400 (you might have to live in the state for 10 years to get it, though).
Since there are no estate or inheritance taxes in Delaware, you can pass along more of your wealth to the grandkids, too (or to other family, friends or charities).
The only downside—and it really isn’t that bad—are middle-of-the-road income taxes. The rates are comparatively reasonable, and residents age 60 and older can exclude up to $12,500 of pension and other retirement income (including dividends and interest, capital gains, IRA and 401(k) distributions, etc.). Social Security benefits are also exempt. But, in the end, income taxes don’t add enough to a retiree’s overall tax burden to keep the state out of the top spot on our list.
About our Methodology
Our tax maps and related tax content include data from a wide range of sources. To generate our rankings, we created a metric to compare the tax burden in all 50 states and the District of Columbia.
Data sources
Income tax – Our income tax information comes from each state’s tax agency. Income tax forms and instructions were also used. See more about how we calculated the income tax for our hypothetical retired couples below under “Ranking method.”
Property tax – The median property tax rate is based on the median property taxes paid and the median home value in each state for 2019 (the most recent year available). The data comes from the U.S. Census Bureau.
Sales tax – State sales tax rates are from each state’s tax agency. We also cite the Tax Foundation’s figure for average combined sales tax, which is a population-weighted average of state and local sales taxes. In states that let local governments add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.
Ranking method
The “tax-friendliness” of a state depends on the sum of income, sales and property tax paid by our two hypothetical retired couples.
To determine income taxes due, we prepared returns for both couples. The first couple had $15,000 of earned income (wages), $20,500 of Social Security benefits, $4,500 of 401(k) plan distributions, $4,000 of traditional IRA withdrawals, $3,000 of Roth IRA withdrawals, $200 of taxable interest, $1,000 of dividend income, and $1,800 of long-term capital gains for a total income of $50,000 for the year. They also had $10,000 of medical expenses, paid $2,500 in real estate taxes, paid $1,200 in mortgage interest, and donated $1,900 (cash and property) to charity.
The second couple had $37,500 of Social Security benefits, $26,100 of 401(k) plan distributions, $18,200 of private pension money, $4,000 of traditional IRA withdrawals, $2,000 of Roth IRA withdrawals, $2,000 of tax-exempt municipal bond interest (from the state of residence), $2,000 of taxable interest, $4,000 of dividend income, and $4,200 of long-term capital gains for a total income of $100,000 for the year. They also had $10,000 of medical expenses, paid $3,200 in real estate taxes, paid $1,500 in mortgage interest, and donated $4,300 (cash and property) to charity.
Since some states have local income taxes, we domiciled both our couples in each state’s capital, from Juneau to Cheyenne. We calculated their 2019 income tax returns using software from eFile.com.
How much they paid in sales taxes was calculated using the IRS’ Sales Tax Calculator, which is localized to zip code. To determine those, we used Zillow to determine zip codes with housing inventory close to our sample assessed value.
How much each hypothetical family paid (and deducted on their income tax return, if allowed) in property taxes was calculated by assuming a residence with a $250,000 assessed value for the first couple and a $350,000 assessed value for the second couple. We then applied each state’s median property tax rate to that appropriate amount.
Content provided by:
