As retirees approach the end of their working days, the decision of where to spend their golden years becomes crucial. Understanding the cost of living in different areas and the tax implications is essential. Not all states treat retirement income the same way, so it’s important to explore your options.
Let’s dive into how different states tax retirement income, including those where you can enjoy tax-free living.
States with no income tax
Income from retirement distributions, such as 401(k) plans or IRAs, is typically subject to taxation.
Fortunately, there are several states that do not impose a state income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Additionally, New Hampshire does not have an income tax but taxes interest and dividend payments. However, there are strategies to avoid this tax by utilizing tax-advantaged plans like IRAs. The state is set to repeal the tax on interest and dividends in 2025.
While Washington does have a capital gains tax, there are exemptions and deductions available to reduce the tax burden.
States that don’t tax retirement income
In addition to the states without an income tax, there are four states that do not tax retirement income: Illinois, Iowa, Mississippi, and Pennsylvania. Here’s a breakdown of each state’s tax policies.
Illinois
Illinois exempts all retirement income, including pension payments and distributions from retirement plans, from state income tax. Social Security payments are also tax-free.
Iowa
Starting in 2023, Iowa residents over 55 are no longer taxed on their retirement income due to a 2023 law. The state income tax rates will gradually decrease to 3.9% by 2026.
Mississippi
Mississippi does not tax retirement income as long as plan requirements are met. Early distributions may not qualify as retirement income and could be subject to tax and penalties.
Pennsylvania
Retirement income is not taxed in Pennsylvania if plan requirements are met. Early withdrawals from retirement plans may incur taxes.
States that don’t tax Social Security
Forty-one states and the District of Columbia do not tax Social Security income for retirees.
Recent states like Kansas, Missouri, and Nebraska have eliminated taxes on Social Security, with others phasing out the tax. Here is the list of states that do not tax Social Security income:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
Nine states tax Social Security benefits, including Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. West Virginia is phasing out its tax on Social Security and will eliminate it by 2026.
Other retirement income tax considerations
While some states do not tax retirement income at all, others offer exemptions. Military retirement pay may be exempt in some states, and pension income may be treated differently from distributions from retirement plans.
Before choosing a state to retire in, it’s important to understand the tax implications fully. Consider not just retirement income taxes, but also sales and property taxes. Ultimately, the decision to pay higher taxes in exchange for other benefits is a personal one.
Conclusion
If you’re seeking to minimize state taxes on your retirement income, you have 13 tax-free states to choose from, with many others offering exemptions. Researching the tax landscape of a state before relocating is crucial. While reducing your tax burden can enhance your retirement lifestyle, remember that taxes are just one piece of the puzzle.