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Some states offer tax advantages that can help stretch retirement savings, while others exempt certain types of retirement income from taxation. Retirees planning to maintain their quality of life on a fixed income might consider moving to one of these tax-friendly states. But it’s important to get the full picture of how your finances will be affected before you decide to relocate in retirement.
Key Takeaways
- Retirees should consider a state’s property, sales, income, inheritance, and estate taxes before choosing a retirement destination.
- Many of the most tax-friendly states for retirees have no income tax and low property and sales taxes.
- Cost of living is also essential when determining how far you can stretch retirement income.
Factors To Consider When Choosing a Tax-Friendly State for Retirement
Tax rates are a significant factor for older individuals considering where to settle down in retirement. States with lower property, sales, and income tax rates may help retirees enjoy their desired lifestyle.
Other tax rates to note include those on Social Security benefits, retirement account withdrawals, retirement income exemptions, and inheritances.
Tip
It’s also crucial to consider other benefits and drawbacks of a potential new home state, including the cost of living, the accessibility and availability of health care facilities, and overall quality of life.
These are some key factors to keep in mind when looking at tax-friendly states for retirement:
Property Taxes
Higher property taxes may significantly impact the cost of living. While Hawaii, Alabama, Nevada, Colorado, and South Carolina are the states with the lowest effective property tax rates, remember that rates may vary by county.
Sales Taxes
Low sales taxes can help to keep the cost of day-to-day purchases down, which is particularly important during periods of high inflation. Oregon, New Hampshire, Montana, Delaware, and Alaska all have no sales tax, although these states may have higher tax rates in other areas.
Retirement Income Taxes
Eight states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming) do not tax income at all. For retirees, this means any income from Social Security, a pension, or distributions from a retirement account will not be taxed by the state. Similarly, any regular income from a part- or full-time job will not be taxed either.
Note
Washington doesn’t tax income, but it does tax capital gains for high earners–unlikely to be a problem for the majority of retirees.
Estate and Inheritance Taxes
Most states do not impose estate or inheritance taxes. However, the District of Columbia and 12 states do impose estate taxes in some cases, and five other states impose inheritance taxes. Only Maryland levies both estate and inheritance taxes.
Capital Gains Taxes
Most states tax capital gains at the same rate as income taxes. However, eight states tax capital gains at a lower rate than other income. These states are Arkansas, Arizona, Hawaii, Montana, New Mexico, North Dakota, South Carolina, and Wisconsin.
Best Tax-Friendly States for Retirees
Some of the most tax-friendly states for retirees include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Each of these states has no income tax, giving them an advantage over most other states. They offer a mixture of other tax implications, such as low property taxes, sales taxes, and tax burdens. Further, they also offer low cost of living or quality of life benefits.
Alaska
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 1.14% of property value
- Sales taxes: 1.821%
- Tax burden as % of income: 4.6%
- Cost of living index: 123.8
- Quality of life rank: #45
Alaska does not tax personal income, capital gains, or inheritance and estates. It also does not have a statewide sales tax, though municipalities have an average tax of 1.821%. Therefore, it’s worthwhile for retirees considering Alaska to research different parts of the state to find the best tax environment for them.
Warning
Being so remote, Alaska’s cost of living is quite high (123.8 compared to a baseline of 100). It also has a particular draw for outdoor enthusiasts but may not appeal to others.
Florida
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 0.79% of property value
- Sales taxes: 6.948%
- Tax burden as % of income: 9.1%
- Cost of living index: 102.8
- Quality of life rank: #9
Besides offering no taxes on income, capital gains, or inheritances, Florida has a fairly low property tax rate of 0.79% of property value. Its sales tax is high, though, and the state’s location may increase the risk to retirees of weather- and climate change-related property damage. Still, there are reasons beyond just the sun and the beach that so many older individuals look to Florida when thinking about retirement.
Nevada
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 0.49% of property value
- Sales taxes: 8.236%
- Tax burden as % of income: 9.6%
- Cost of living index: 101.3
- Quality of life rank: #33
Nevada also offers citizens no taxes on income, capital gains, inheritance, or their estate. Property taxes are quite low, at just 0.49% of property value. On the other hand, Nevada’s sales tax of 8.236% is one of the highest rates nationwide, although the state does not tax certain everyday goods like groceries.
New Hampshire
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 1.77% of property value
- Sales taxes: None
- Tax burden as % of income: 9.6%
- Cost of living index: 112.6
- Quality of life rank: #2
One of New Hampshire’s main appeals to tax-conscious retirees is the absence of sales tax of any kind. Couple this with no income, capital gains, or inheritance taxes, and the state offers a compelling case as a retirement destination. It also ranks very highly in overall quality of life thanks to one of the lowest crime rates in the nation and access to incredible natural sites, among other benefits.
South Dakota
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 1.09% of property value
- Sales taxes: 6.114%
- Tax burden as % of income: 8.4%
- Cost of living index: 92.2
- Quality of life rank: #11
Despite having no income, capital gains, or inheritance and estate taxes, South Dakota does have a fairly high property tax rate of 1.09%. There is a special exemption for homeowners age 70 or higher, though, which can delay property tax collection until a home is sold.
Tennessee
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 0.55% of property value
- Sales taxes: 9.556%
- Tax burden as % of income: 7.6%
- Cost of living index: 90.5
- Quality of life rank: #27
Tennessee does not levy an income tax, capital gains tax, or inheritance tax on its residents. Further, it has one of the lower property tax levels nationwide at just 0.55% of property value. By contrast, though, Tennessee has the second-highest sales tax at 9.556%; Louisiana is the only state with a higher sales tax. Still, Tennessee’s overall cost of living is quite low, making it desirable as a retirement destination.
Texas
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 1.58% of property value
- Sales taxes: 8.201%
- Tax burden as % of income: 8.6%
- Cost of living index: 92.7
- Quality of life rank: #29
Like the other states on this list, Texas will not levy income, capital gains, inheritance, or estate taxes on citizens, including retirees. Its property tax rate of 1.58% is fairly high compared to some other states on this list, though, and sales taxes are generally quite high. Like Nevada, though, groceries and prescription medications are exempt from sales tax, which helps to keep costs down. In total, Texas has a below-average cost of living of 92.7.
Wyoming
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- Retirement income taxes: None
- Capital gains taxes: None
- Inheritance/estate taxes: None
- Property taxes: 0.58% of property value
- Sales taxes: 5.441%
- Tax burden as % of income: 7.5%
- Cost of living index: 95.5
- Quality of life rank: #12
Like many other top destinations for retirees, Wyoming entices prospective homebuyers with no income, capital gains, inheritance, or estate taxes. Its property tax rate of 0.58% is also low, and sales taxes are fairly middle-of-the-road at 5.441%. With easy access to Yellowstone National Park and many other scenic outdoor sites, Wyoming is ranked 12 in overall quality of life.
| Most Tax-Friendly States for Retirees | ||||||||
|---|---|---|---|---|---|---|---|---|
| State | Retirement Income Taxes | Capital Gains Taxes | Estate/Inheritance Taxes | Property Taxes | Sales Taxes | Tax Burden | COLI | QOL Rank |
| Alaska | No | No | No | 1.14% | 1.821% | 4.6% | 123.8 | 45 |
| Florida | No | No | No | 0.79% | 6.948% | 9.1% | 102.8 | 9 |
| Nevada | No | No | No | 0.49% | 8.236% | 9.6% | 101.3 | 33 |
| New Hampshire | No | No | No | 1.77% | No | 9.6% | 112.6 | 2 |
| South Dakota | No | No | No | 1.09% | 6.114% | 8.4% | 92.2 | 11 |
| Tennessee | No | No | No | 0.55% | 9.556% | 7.6% | 90.5 | 27 |
| Texas | No | No | No | 1.58% | 8.201% | 8.6% | 92.7 | 29 |
| Wyoming | No | No | No | 0.58% | 5.441% | 7.5% | 95.5 | 12 |
Tips for Retirees Planning To Relocate to a Tax-Friendly State
Though the states listed above are among the most tax-friendly, your preferred state may not be on this list. Depending on income sources, lifestyle, and goals for retirement, there may be another destination that is better for you.
This is why it is essential to thoroughly research states you may be considering for retirement—not only for tax implications but for lifestyle considerations, health care accessibility, community, culture, and other factors that will impact your daily experience there. Financial advisors can be helpful when it comes to maximizing your income in retirement and taking advantage of tax incentives.
Finally, keep in mind that changing residency has costs as well, including moving expenses, the costs associated with buying a new home and selling an old one, and so on.
The Bottom Line
Many of the most tax-friendly states for retirees have no personal income taxes as well as low property and sales taxes. They tend to also have a low overall tax burden. Many also exempt estate and inheritance taxes and do not tax capital gains.
However, there are a host of other factors to consider in addition to tax rates when it comes to selecting a retirement destination. Keep in mind that the overall cost of life will be a big determinant of how far your income goes. Beyond that, quality of life rankings and evaluations differ considerably among the states on this list. Be sure to thoroughly research any tax implications of a big move and discuss your options with a trusted financial advisor.
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