Most and Least Tax-Friendly States for Retirees

Tax season takes a bigger bite out of retirement in some states than in others. Several states don't have their own income tax, but retirees also need to consider sales taxes, property taxes, and whether there are taxes on Social Security, retirement distributions, estates, and inheritance. That bigger picture is what makes some states retirement havens, and others a drain on retiree resources. Based on 2020 data from Kiplinger, here are the 10 best and worst states for retired taxpayers. 

Mia Taylor and Jason Notte also contributed to this report.

Related: 9 Common Tax Mistakes Retirees Make

First, the bad news: Tennessee has the nation’s highest combined state and local sales tax rate, an average of 9.55%. And groceries, exempt in many other states, are taxed at 4%, not including applicable local taxes — ouch. (Prescription drugs are still exempt.) 

Why you’ll still want to move here: Tennessee’s lack of state income tax is a major boon. There are also no taxes on Social Security benefits, pensions, or distributions from retirement plans, nor are there estate or inheritance taxes. A 1% tax on interest and dividends has been eliminated starting in the 2021 tax year. And if all that wasn’t good enough, low property taxes are the icing on the Rocky Top cake: The median is only $636 per $100,000 in home value, and there are property-tax reimbursements for income-eligible seniors. 

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First, the bad news: Just like Tennessee, Arkansas has hefty sales taxes: The combined state and local average is 9.51%. There is a state tax on groceries (though it’s negligible at 0.125%) but prescription drugs are exempt.

Why you’ll still want to move here: Like Tennessee, there’s no estate or inheritance tax, and there are no taxes on Social Security benefits. (Other types of retirement income, like distributions from retirement plans, are taxed after a $6,000 exemption.) Property taxes are very low at a median of $612 per $100,000 in home value, and seniors can get their taxable home values frozen, guarding against big hikes in the future. Finally, the relatively moderate income taxes are especially friendly to lower wage earners.

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First, the bad news: The temperature isn’t the only thing that’s high. The average combined state and local sales tax rate is 8.4%, though groceries and prescription drugs are exempt. Also, high income earners should beware: As of the 2021 tax year, there is a new 3.5% surtax on taxable income greater than $250,000 for single filers, and $500,000 for joint filers. 

Why you’ll still want to move here: Social Security benefits are exempt from state income tax, and there’s no estate tax or inheritance tax. As a bonus, up to $2,500 in income from federal and Arizona government retirement plans is also exempt. State income tax is a relatively modest 2.59% on taxable income of $27,272 or less for single filers or $54,544 for joint filers. The rate jumps to 4.5% for single filers with income over $163,362, or couples with combined income of more than $327,263 — still not terrible. Also, property taxes are low at a median of $617 per $100,000 in home value, and lower-income senior homeowners can freeze property values for three years to keep tax bills modest.

Related: Valuable Tax Breaks for Seniors

First, the bad news: Again, the thorn in your side here will be high sales taxes, at an average combined state and local rate of 7.46%. However, groceries and prescription drugs are exempt.

Why you’ll still want to move here: Social Security benefits are exempt from state income tax, and there is no estate or inheritance tax. Seniors can also exclude up to $10,000 in retirement income from taxes (the limit is $3,000 for those under 65). Seniors who are single filers are also allowed to deduct $15,000 from other taxable income, or $30,000 for joint filers. Best of all, property taxes are very low, at a median of $601 per $100,000 in home value, and seniors who’ve lived in South Carolina for at least a year can also exempt the first $50,000 in property value. 

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First, the bad news: The average combined state and local sales tax rate is relatively high at 7.72%, though groceries and prescription drugs are exempt. Also, while residents 65 and up can exempt up to $24,000 in Social Security benefits or other retirement income from state tax, it’s worth noting that anything above that is taxable.

Why you’ll still want to move here: Aside from the fresh mountain air, the major draw here is low, low, low (did we say low?) property taxes. The median is just $494 per $100,000 in home value, and there are a variety of programs that can help seniors reduce that tax burden even more, including a generous 50% exemption on the first $200,000 in value for long-term residents. There is no estate or inheritance tax, and the flat-rate income tax, 4.55%, is moderate.

Related: Counties With the Highest and Lowest Property Taxes

First, the bad news:Sales tax is on the higher end at an average combined state and local rate of 8.23%, but groceries and prescription drugs are exempt. Also disappointing: There are no property-tax breaks for seniors.

Why you’ll still want to move here: No income tax, no estate tax, and no inheritance tax mean your retirement savings can go a long way here — just don’t lose it all at the slot machines. Social Security benefits and other forms of retirement income aren’t taxed, either. Finally, while seniors don’t qualify for special property-tax breaks, they may not need them: Property taxes are low, at a median of $533 per $100,000 in home value.

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First, the bad news: When it comes to taxes, the news is all good (really). But it’s worth considering that Wyoming has fewer residents than many U.S. cities, and the climate can be rough. High health-care costs are another consideration.

Why you’ll still want to move here: Wyoming has no state income tax, estate tax, or inheritance tax. And while other states often jack up their sales taxes in lieu of those things, not Wyoming: The average state and local sales tax rate is just 5.33%. And if you’re asking yourself whether there’s a property-tax catch here, the answer is no. While there are states with lower rates on our list, Wyoming’s median is just $575 per $100,000 in home value. 

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First, the bad news: D.C. is a notoriously expensive place to live, with eye-popping housing costs whether you want to rent or buy. Retirement income, like distributions from 401(k) plans, is taxed. And if you’re lucky enough to worry about it, take note: There’s a tax on estates over $4 million, with rates starting at 11.2%.

Why you’ll still want to move here:This not-quite-a-state actually has moderate sales taxes, clocking in at 6%, with groceries and prescriptions exempt. There are also surprisingly low property taxes, with a median of $564 per $100,000 in home value, with special property tax breaks for seniors — for instance, there’s a 50% reduction for seniors with a household adjusted gross income of under $135,750. Perhaps most importantly, Social Security benefits aren’t taxed, and there’s a fat income tax credit of up to $1,200 for qualifying senior property owners. 

First, the bad news: If you make more than the average bear, Hawaii might not be the place for you — if you’ve got taxable income over $200,000 (or $400,000 for joint filers) it’s subject to the top income-tax rate, a painful 11%. There are estate taxes starting at 10% for estates of $5.49 million and up. And even if you’re of more modest means, the cost of living in Hawaii is high, with very high housing prices.

Why you’ll still want to move here: Aside from getting to live in a tropical paradise, you mean? Well, the first reason is property taxes: They just don’t get any lower, at a median of only $280 per $100,000 in home value. Sales taxes are also low, with a combined state and local average of just 4.4% (one small bummer: groceries aren’t exempt). Finally, Social Security benefits are tax exempt, as are employer contributions to pensions and 401(k) plans.

First, the bad news: The major drawback in Delaware is income taxes — but they’re really not all that bad. Rates start at 2.2% on taxable income from $2,001 to $5,000 and top out at 6.6% on taxable income of more than $60,000. 

Why you’ll still want to move here: Should the First State be the first destination for tax-averse retirees? Delaware does have a lot going for it, including no sales taxes. There are also no estate or inheritance taxes. Average property tax is a very modest median $562 per $100,000 in home value, and some seniors qualify for school property tax credits. Finally, Social Security benefits are tax exempt, and the 60+ crowd can exclude as much as $12,500 in retirement income. This includes pensions, dividends and interest, capital gains, and IRA and 401(k) distributions. 

Related: Unexpectedly Awesome Places to Retire Across America

The silver lining: All is not lost for retirees who are considering the Lone Star State. After all, there’s no state income tax, so your Social Security benefits and other retirement income are completely in the clear. And there are some modest property-tax relief programs.

Why you’ll still want to steer clear: Unfortunately, Texas more than makes up for its income-tax generosity in other ways. Sales taxes, for instance, average a painful combined state and local rate of 8.19%, though groceries and prescriptions are exempt. Perhaps more importantly, property taxes are on the higher end, too, with a median of $1,692 per $100,000 in home value. That hurts, even if you qualify for programs including a $10,000 homestead exemption or a school-tax freeze.

The silver lining: Property taxes are high, but seniors may have access to some pretty decent tax breaks. Local governments and school districts, for instance, are able to reduce the assessed value of a senior’s home by 50%, subject to income limits. Income tax rates (4% to 8.82%) could be worse, and Social Security benefits, federal and New York government pensions, and military retirement pay are all exempt.

Why you’ll still want to steer clear:New York is notorious for being a pricey place to live, and property taxes don’t help. The median is a steep $1,692 per $100,000 in home value. Another big drawback: High sales taxes, which average a hefty 8.52% combined state and local rate. (Fortunately, food and prescription drugs are excluded.) Also a downer: Anything over $20,000 drawn from a private retirement plan will be taxed. There’s no inheritance tax, but estates of more than $5.93 million are taxed.

The silver lining: It doesn’t cost a lot to live in Iowa, and its sales taxes, a combined state and local average of 6.94%, could be worse. Social Security benefits are exempt, and there is no estate tax. 

Why you’ll still want to steer clear: Income and property taxes are on the higher end here. For example, the top income tax rate of 8.53% kicks in on income at a relatively low threshold of $74,970, and you may have to pay surtax for schools or emergency services. As for property taxes, they work out to a high median of $1,529 per $100,000 in home value. Also, Iowa does have inheritance taxes of up to 15%.

The silver lining:Sales taxes are low, at a combined state and local average of 5.43%. Groceries and prescriptions are exempt, too. There are no estate and inheritance taxes, and Social Security benefits are exempt.

Why you’ll still want to steer clear:The first big reason you may not want to become a Cheesehead? Ouch-worthy property taxes, which are a median of $1,684 per $100,000 in home value, with little relief available for seniors. And while income taxes are moderate, the majority of income from pensions, annuities, and distributions from IRAs and 401(k) plans are taxable. A modest $5,000 exclusion is available for lower-income seniors.

The silver lining: Sales taxes are below average here, working out to an average of 6.24% when you consider both state and local rates. Groceries, clothing, and prescriptions are all exempt. Homeowners 65 and older may also qualify for a property tax credit worth as much as $8,000, subject to income restrictions. 

Why you’ll still want to steer clear:Vermont has high income taxes for top earners, and taxes all or part of Social Security benefits for single filers who have a federal adjusted gross income of more than $45,000, or more than $60,000 for joint filers. Worst of all, property taxes are very, very high at a median of $1,861 per $100,000 in home value. Estates over $5 million are subject to a 16% flat-rate tax.

The silver lining: Cost of living in Nebraska is quite low, and the average state and local sales tax rate of 6.94% could be worse (to be fair, it could be better, too). 

Why you’ll still want to steer clear: Unfortunately, there’s a lot to dissuade retirees from becoming Cornhuskers. There’s an inheritance tax of up to 18%, but income and property taxes are the major one-two punch. Retirement income, such as IRA withdrawals, 401(k) funds, and public and private pensions, is taxed. Social Security isn’t off the hook, either, for residents with federal adjusted gross income over relatively modest levels. Income tax, meanwhile, tops out at 6.84%, but that rate kicks in at a pretty low level: $31,750 for single filers or $63,500 for joint filers. Finally, property taxes are also relatively high at a median of $1,614 per $100,000 in home value, though there is a homestead exemption for lower-income seniors.

The silver lining:Like Nebraska, Kansas boasts a low cost of living. And if estate or inheritance taxes are a concern, you’ll find neither in the Sunflower State. 

Why you’ll still want to steer clear: Income taxes, sales taxes, and property taxes are a triple whammy here. The maximum income tax rate of 5.7% applies to taxable single-filer income of $30,000 or more, and joint-filer income of $60,000 or more. Pensions and retirement distributions are taxed fully, as is Social Security for those making more than $75,000. The average state and local sales tax rate works out to a high 8.69%, and unlike in many states, groceries and prescription drugs aren’t exempt. You won’t make up any ground with property taxes: The median is $1,369 per $100,000 in home value, though lower-income seniors may be eligible for some relief.

The silver lining: Sales taxes could be worse: They’re 6.35% without any local add-ons, and groceries and prescription drugs are exempt. Also, 28% of pension or annuity income is tax exempt for single filers earning under $75,000, or $100,000 for joint filers — and this exemption will keep growing up until it reaches 100% in 2025. Social Security benefits are exempt subject to those same income limits.

Why you’ll still want to steer clear: Got a federal adjusted gross income of more than $75,000, or $100,000 for joint filers? The 25% of Social Security benefits that are taxed at the federal level are also taxed by Connecticut. The bigger con: Property taxes. The median is $2,139 per $100,000 in home value, third-highest in the country. Ouch. And yes, there's an estate tax of up to 12%, as well as a gift tax of up to 12%. Connecticut is the only state in the country that imposes a gift tax.

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The silver lining:As far as property taxes go, seniors are able to apply for a homestead exemption of as much as $5,000, or $8,000 in Cook County. There’s also an option to freeze your home’s assessed value if you earn $65,000 or less annually, and there’s a tax deferral program. Even better, Social Security benefits and income from most retirement plans are not taxed, and the state has a fairly modest 4.95% flat income tax. 

Why you’ll still want to steer clear:The (really, really big) catch? The property taxes, at a median of $2,165 per $100,000 in home value, are no joke. That’s the second-steepest rate in the country. Sales taxes are also a killer, at an average combined state and local rate of 8.82%, with no exemptions for groceries or prescription drugs. Got an estate valued at $4 million or more? Estate taxes range from 0.8% to a painful 16%.

The silver lining: Income taxes are reasonable, mostly because joint filers are allowed to exclude up to $100,000 of income from a pension, annuity, IRA, or other retirement plan if their New Jersey income is $100,000 or less. (Single taxpayers and married taxpayers filing separately are permitted to exclude as much as $75,000 and $50,000.) Social Security benefits are not taxed in New Jersey, and combined state and local sales taxes work out to a reasonable 6.6%. An estate tax was recently axed, too. 

Why you’ll still want to steer clear: Even after those pros, living in New Jersey still means a sizable tax burden thanks to the nation’s highest property taxes: a median of $2,417 per $100,000 in home value. For reference, that’s $9,668 in taxes on a $400,000 home, year after year after year. New Jersey reimburses eligible seniors for property tax increases, but you must be a long-term resident with income below specific limits. There is also an inheritance tax from 11% to 16% in the Garden State, and it kicks in at just $500, subject to certain exemptions.