Choosing the right state for retirement can save you thousands of dollars in taxes each year. Here are the most tax-friendly states for retirees and what makes them attractive from a tax perspective.
Table of Contents
- What Makes a State Tax-Friendly?
- Top 10 Most Tax-Friendly States
- Detailed State Analysis
- States by Retirement Income Type
- Hidden Tax Considerations
- How to Evaluate States
- Real-World Examples
- Making the Decision
What Makes a State Tax-Friendly?
Key Factors
1. No or Low Income Tax:
- No state income tax is best
- Low rates are good
- Why: Major impact on retirement income
2. Retirement Income Exemptions:
- Social Security not taxed
- Pensions exempt or partially exempt
- IRA/401(k) distributions exempt or partially exempt
- Why: Reduces tax on retirement income
3. Low Property Taxes:
- Lower property tax rates
- Homestead exemptions
- Senior exemptions
- Why: Major expense for homeowners
4. Reasonable Sales Tax:
- Lower sales tax rates
- Exemptions for necessities
- Why: Affects daily spending
5. No Estate/Inheritance Tax:
- No estate tax
- No inheritance tax
- Why: Protects heirs
Top 10 Most Tax-Friendly States
1. Florida
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ No inheritance tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Homestead exemption (reduces property tax)
- ✅ Low property taxes (with exemptions)
Property Tax: ~0.9% average (with homestead exemption)
Sales Tax: 6% (plus local, up to ~7.5%)
Best For: All retirees, especially those with high retirement income
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$4,500 (on $500,000 home with exemption)
- Total state tax burden: Low
2. Nevada
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Low property taxes
Property Tax: ~0.6% average
Sales Tax: 6.85% (plus local)
Best For: All retirees
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$3,000 (on $500,000 home)
- Total state tax burden: Very low
3. Texas
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Homestead exemption
Property Tax: ~1.8% average (but homestead exemption helps)
Sales Tax: 6.25% (plus local, up to ~8.25%)
Best For: All retirees
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$9,000 (on $500,000 home, but exemptions help)
- Total state tax burden: Low to moderate
4. Wyoming
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Low property taxes
- ✅ Low sales tax
Property Tax: ~0.6% average
Sales Tax: 4% (plus local, up to ~6%)
Best For: All retirees, especially those wanting low overall taxes
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$3,000 (on $500,000 home)
- Total state tax burden: Very low
5. South Dakota
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Low property taxes
Property Tax: ~1.2% average
Sales Tax: 4.5% (plus local)
Best For: All retirees
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$6,000 (on $500,000 home)
- Total state tax burden: Low
6. Alaska
Why It's Tax-Friendly:
- ✅ No state income tax
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ✅ Low property taxes
- ✅ No state sales tax (some local)
Property Tax: ~1.2% average
Sales Tax: 0% (state), some local
Best For: Retirees who can handle cold weather and high cost of living
Example: $100,000 retirement income
- State income tax: $0
- Property tax: ~$6,000 (on $500,000 home)
- Total state tax burden: Very low (but high cost of living)
7. Tennessee
Why It's Tax-Friendly:
- ✅ No income tax on wages
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ⚠️ Taxes interest and dividends (but phasing out)
Property Tax: ~0.7% average
Sales Tax: 7% (plus local, up to ~9.75%)
Best For: Retirees (interest/dividend tax phasing out)
Example: $100,000 retirement income
- State income tax: $0 (on most retirement income)
- Property tax: ~$3,500 (on $500,000 home)
- Total state tax burden: Low
8. New Hampshire
Why It's Tax-Friendly:
- ✅ No income tax on wages
- ✅ No estate tax
- ✅ Social Security not taxed
- ✅ Pensions not taxed
- ⚠️ Taxes interest and dividends (but phasing out)
Property Tax: ~2.2% average (higher, but no income tax)
Sales Tax: 0%
Best For: Retirees (interest/dividend tax phasing out)
Example: $100,000 retirement income
- State income tax: $0 (on most retirement income)
- Property tax: ~$11,000 (on $500,000 home)
- Total state tax burden: Moderate (high property tax, but no income/sales tax)
9. Arizona
Why It's Tax-Friendly:
- ✅ Low income tax (2.5% - 4.5%)
- ✅ Social Security not taxed
- ✅ Pensions partially exempt
- ✅ Low property taxes
Property Tax: ~0.6% average
Sales Tax: 5.6% (plus local, up to ~10.7%)
Best For: Retirees with moderate income
Example: $100,000 retirement income
- State income tax: ~$2,500 (at 2.5% rate)
- Property tax: ~$3,000 (on $500,000 home)
- Total state tax burden: Low to moderate
10. Delaware
Why It's Tax-Friendly:
- ✅ Moderate income tax (2.2% - 6.6%)
- ✅ Social Security not taxed
- ✅ Pensions partially exempt
- ✅ Low property taxes
- ✅ No sales tax
Property Tax: ~0.6% average
Sales Tax: 0%
Best For: Retirees who spend a lot (no sales tax)
Example: $100,000 retirement income
- State income tax: ~$3,000 (depending on bracket)
- Property tax: ~$3,000 (on $500,000 home)
- Total state tax burden: Moderate
Detailed State Analysis
Florida Deep Dive
Income Tax: None
Retirement Income:
- Social Security: Not taxed
- Pensions: Not taxed
- IRA/401(k): Not taxed (no income tax)
Property Tax:
- Average: ~0.9%
- Homestead exemption: Up to $50,000 reduction
- Senior exemption: Additional $50,000 for 65+
Sales Tax: 6% (plus local, up to ~7.5%)
Estate Tax: None
Overall: Excellent for retirees
Nevada Deep Dive
Income Tax: None
Retirement Income:
- Social Security: Not taxed
- Pensions: Not taxed
- IRA/401(k): Not taxed (no income tax)
Property Tax:
- Average: ~0.6%
- Senior exemptions available
Sales Tax: 6.85% (plus local)
Estate Tax: None
Overall: Excellent for retirees
Texas Deep Dive
Income Tax: None
Retirement Income:
- Social Security: Not taxed
- Pensions: Not taxed
- IRA/401(k): Not taxed (no income tax)
Property Tax:
- Average: ~1.8%
- Homestead exemption: Reduces taxable value
- Senior exemptions available
Sales Tax: 6.25% (plus local, up to ~8.25%)
Estate Tax: None
Overall: Good for retirees (property tax can be high, but exemptions help)
States by Retirement Income Type
Best for High Social Security
States That Don't Tax Social Security:
- Florida
- Nevada
- Texas
- Wyoming
- South Dakota
- Why: No state tax on Social Security
Best for High Pensions
States That Exempt Pensions:
- Florida (no income tax)
- Nevada (no income tax)
- Illinois (pensions not taxable)
- Pennsylvania (pensions not taxable)
- Why: Pensions exempt or no income tax
Best for High IRA/401(k) Distributions
States with No Income Tax:
- Florida
- Nevada
- Texas
- Wyoming
- South Dakota
- Why: No income tax on distributions
Hidden Tax Considerations
Cost of Living
Not Just Taxes:
- High cost of living can offset tax savings
- Why: Total expenses matter
Example:
- State A: Low taxes, high cost of living
- State B: Moderate taxes, low cost of living
- May be similar: Total expenses
Healthcare Costs
Vary by State:
- Healthcare costs vary
- May offset tax savings
- Why: Major expense in retirement
Local Taxes
Don't Forget Local:
- City/county taxes
- Local sales tax
- Why: Can add significantly
How to Evaluate States
Calculate Total Tax Burden
Include All Taxes:
- Income tax
- Property tax
- Sales tax (on spending)
- Estate tax (if applicable)
- Why: Total matters
Consider Your Situation
Your Retirement Income:
- Social Security amount
- Pension amount
- IRA/401(k) distributions
- Other income
- Why: Different states treat differently
Calculate Savings
Compare States:
- Calculate tax in current state
- Calculate tax in potential state
- Difference: Potential savings
Example:
- Current (California): $14,000/year
- Potential (Florida): $5,000/year
- Savings: $9,000/year
Real-World Examples
Example 1: High Retirement Income
Situation: $150,000 retirement income ($50,000 Social Security, $50,000 pension, $50,000 IRA)
California:
- Income tax: ~$9,000
- Property tax: ~$8,000
- Total: ~$17,000
Florida:
- Income tax: $0
- Property tax: ~$4,500
- Total: ~$4,500
- Savings: $12,500/year
Example 2: Moderate Retirement Income
Situation: $75,000 retirement income ($30,000 Social Security, $25,000 pension, $20,000 IRA)
New York:
- Income tax: ~$4,500
- Property tax: ~$10,000
- Total: ~$14,500
Nevada:
- Income tax: $0
- Property tax: ~$3,000
- Total: ~$3,000
- Savings: $11,500/year
Example 3: Low Retirement Income
Situation: $40,000 retirement income ($25,000 Social Security, $15,000 IRA)
Illinois:
- Income tax: ~$2,000
- Property tax: ~$12,000
- Total: ~$14,000
South Dakota:
- Income tax: $0
- Property tax: ~$6,000
- Total: ~$6,000
- Savings: $8,000/year
Making the Decision
Consider All Factors
Not Just Taxes:
- Taxes
- Cost of living
- Healthcare access
- Climate
- Family/friends
- Quality of life
- Why: Balance all factors
Calculate Real Savings
After Cost of Living:
- Tax savings
- Minus cost of living difference
- Net savings: Real benefit
Example:
- Tax savings: $10,000/year
- Cost of living increase: $5,000/year
- Net savings: $5,000/year
Test the Waters
Before Moving:
- Visit potential states
- Rent before buying
- Why: Make sure it's right for you
Bottom Line
Best states for tax-friendly retirement:
- Florida, Nevada, Texas, Wyoming, South Dakota: No income tax, very tax-friendly
- Consider all taxes: Income, property, sales, estate
- Match state to your income: Social Security, pension, IRA
- Calculate total burden: Not just one tax
- Balance with other factors: Cost of living, quality of life
Key Takeaways:
- Top tax-friendly states: Florida, Nevada, Texas, Wyoming, South Dakota
- No income tax states: Best for high retirement income
- Consider all taxes: Income, property, sales, estate
- Match state to income: Consider what you have (Social Security, pension, IRA)
- Calculate total burden: All taxes matter
- Balance with other factors: Cost of living, healthcare, quality of life
- Savings can be significant: Thousands per year
Action Steps:
- Research tax-friendly states for retirees
- Understand how each state taxes your specific retirement income
- Calculate total tax burden (income, property, sales, estate)
- Compare potential savings from moving
- Consider cost of living differences
- Balance taxes with other factors (healthcare, climate, etc.)
- Visit potential states before moving
- Work with professional if needed
Remember: Choosing a tax-friendly state for retirement can save you thousands of dollars per year. Research how each state taxes your specific retirement income sources, calculate total tax burden, and balance tax savings with other important factors like cost of living and quality of life. The right state choice can significantly improve your retirement finances.