Last updated on October 2nd, 2024 at 06:03 pm
Why retire in a state where you will pay state income tax on retirement income? Move to a tax-friendly state where you can afford to live for less and the state does not become your financial partner. When you withdraw that 401k or traditional Internal Revenue Service money you have been saving for years, most states will take a bite.
It’s enough that the IRS owns part of your retirement portfolio and will tax Social Security benefits, why give more to your current state?
New York for example will want their fair share of various retirement income payments. Same with California when you go to buy that new car with your IRA. Not only will you pay sales tax but when you took that money from your retirement funds, they want a piece f that as well. Many states tax pension payments.
I believe that when most people look at their retirement savings statements, they fail to consider that their investors (state and federal government) will want their share.
Take a deep dive into lots of taxes
This article takes a deep dive into taxes of all kinds. The focus of the article is to retire in a state that won’t tax retirement income. There are other forms of taxes that can actually when added together become more important than state income tax alone.
I have included several charts that will permit you to compare and contrast taxes in various states. The data is from 2021 and things change. Don’t focus on the actual number as much as how one state compares to another. Generally, tax increases will be relative.
State X may have increased their tax on gasoline since this data was gathered and State Y will probably do the same. If you need the exact number, do a web search for the latest number.
The chart below indicating States with zero state income tax excluding Tennessee and New Hampshire do not charge state income tax on earned income e.g. W2 income. They do charge state income tax on income earned from investments. This is a problem for retired people who live on investment income. This is why they are not listed below.
States with zero state income tax
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
You may have a retirement plan with for example $100,000. After federal taxes go down to $80,000 then the state takes its amount e.g. 7%, another $7,000. Before you know it, all you have to spend is $73,000. It’s a shock to most people. You were able to defer federal income taxes on your retirement accounts for years, the same with the state. That does not mean you should stay in that state when you withdraw it.
Moving for example to the Mississippi Gulf Coast, you would forgo any future taxes on the withdrawal of income from your traditional IRA. This includes pensions and other ira distributions. Of course, Mississippi does not charge state income tax on Social Security retirement benefits but some other states do. You can save big by relocating to a state that does not tax pension benefits.
States with state income tax but not on Pensions public or private
| State | State Tax on Pension Income | Tax Details |
|---|---|---|
| Alabama | No | Alabama does not tax pension income for taxpayers whose adjusted gross income is less than $75,000 for single filers and $100,000 for joint filers. For those with higher incomes, pension income is taxed at the state’s normal income tax rates. |
| Hawaii | No | Hawaii does not tax pension income for taxpayers whose federal adjusted gross income is less than $100,000 for single filers and $200,000 for joint filers. For those with higher incomes, pension income is taxed at the state’s normal income tax rates. |
| Illinois | No | Illinois does not tax pension income. |
| Mississippi | No | Mississippi does not tax pension income. |
| Pennsylvania | No | Pennsylvania does not tax pension income for taxpayers who are age 59½ or older. |
If the cost of living is also very low, you have won again. The good news keeps getting better in some states. Mississippi for example provides a significant reduction in property taxes to seniors. 100% of disabled people don’t pay any property taxes in Mississippi.
It may be time to look at a state that is not money hungry
If your state government is money hungry you need to be looking at a new state with lower taxes and a much lower total tax burden. This even includes the state sales tax rate. Areas such as New York City charge local taxes. If your source of income is fixed, you can bet that any area where you pay state and local taxes on that fixed retirement income will only go up over time.
Years ago, congress decided to charge federal tax on your monthly retirement benefit from Social Security. You paid taxes on your income when you earned it including the Social Security contribution. Now they charge tax on as much as 85% of your Social Security income.
Consider that you may live in a state where your Social Security payments are taxed. Adding insult to injury. The last thing you need in your golden years is to have the state tax rate increase over time.
The best state in my opinion for overall tax treatment and cost of living in Mississippi. Some others come close but not that close. Florida, Texas, Nevada, and Washington states for example do not have state income taxes. None of these states can offer the low cost of living that you can find on the Mississippi Gulf Coast. I forgot those states that dare to tax your inheritance.
States that tax Inheritance and Estate Income
| State | Inheritance Tax | Estate Tax |
|---|---|---|
| Connecticut | Yes | Yes |
| Hawaii | Yes | Yes |
| Illinois | Yes | Yes |
| Maine | Yes | No (but may tax large estates at the federal level) |
| Maryland | Yes | Yes |
| Massachusetts | Yes | Yes |
| Minnesota | Yes | Yes |
| New Jersey | Yes | Yes |
| New York | Yes | Yes |
| Oregon | No | Yes |
| Washington | No | Yes |
It’s a good idea to look for your retirement home not based upon those stupid articles titled “Best states to retire in” or “Best cities to retire in” or even the reverse, the “10 worst states to retire in”. Regarding the “state”, look at tax practice, existing laws, and where they are going in the future. Politics are key when you look at a state.
The fact is that every state has good places to retire and not-so-good places to retire in. When you see an article that tells you an entire state is good or bad, the writers are lazy.
First, does that state leave your money alone? Next, will they leave it alone in years to come? Their history of tax and spending is important to look into. This brings me back to Mississippi. The state reduced its state income tax recently and is looking into terminating it together.
Everyone received a tax break. As a conservative state, they spend when they need to and where they need to. The legislators work part-time and don’t spend time looking for spending projects.
10 states with the lowest cost of Groceries
| Rank | State | Average Cost of Groceries |
|---|---|---|
| 1 | Mississippi | $226.57 |
| 2 | Arkansas | $240.66 |
| 3 | Oklahoma | $241.40 |
| 4 | Missouri | $242.54 |
| 5 | Tennessee | $243.04 |
| 6 | Kansas | $244.60 |
| 7 | Alabama | $245.82 |
| 8 | Texas | $247.18 |
| 9 | Indiana | $248.46 |
| 10 | South Dakota | $249.38 |
This tells me that the “state” is hospitable to retirees. When they also provide allowances and savings it just gets better. Now you look at a location in that state where you can live comfortably and enjoy what the area has to offer. In Mississippi, the best place to live in the Gulf Coast. I have no idea where the worst place to live is. Who cares as long as you know where the best place is?
You can use the same tactic for other states. Find the state that offers the best economic situation for you, where real estate is affordable and taxes at the state level are moderated. Some good states have personal income tax on non-retirement income.
This type of state taxation you can usually live with if it’s also low. Mississippi’s state income tax is very low as I mentioned, under 4%, and many don’t pay at all. If you are living on retirement income in Mississippi, you need not be concerned about the state income tax
10 States with the lowest cost of living index in the U.S.
| Rank | State | Average Cost of Living Index |
|---|---|---|
| 1 | Mississippi | 84.8 |
| 2 | Arkansas | 86.9 |
| 3 | Oklahoma | 87.0 |
| 4 | Missouri | 87.1 |
| 5 | Alabama | 87.8 |
| 6 | Kentucky | 88.5 |
| 7 | Iowa | 88.7 |
| 8 | Kansas | 89.0 |
| 9 | Indiana | 89.4 |
| 10 | South Dakota | 89.5 |
Retirees in some states can complete the 1040-SR (seniors) tax return. This is because the amount of property taxes and interest they pay on their houses is so low, it’s better to use the new $27,000 (married filing) deduction. Your income will consist of Social Security and perhaps dividends and interest may be below the taxable threshold.
If you have decided not to move from your tax and spend state, the standard deduction may still be all you can deduct because of the caps on taxes and interest you can claim.
In effect, you pay higher state and federal income taxes as a result. This should help you make your decision based on your financial situation. The killer in these high-tax states is the qualified distributions from your retirement accounts over the years. Your individual retirement account will as I mentioned above be hit with the government’s portion. No need to add state tax to this.
States that tax military retirement over 65 years
| State | Taxes Military Retirement Benefits for People over 65 |
|---|---|
| Colorado | Yes |
| Connecticut | Yes |
| Montana | Yes |
| New Mexico | Yes |
| North Dakota | Yes |
| Utah | Yes |
The above list of states that tax military retirement is among the usual suspects. You know the ones who tax everyone. If this article seems to be an attack against paying taxes, you are wrong. The important factor here is that we must pay some taxes to keep our society going. The military must be supported, as health and schools. It’s legal to avoid taxes, it’s illegal to evade taxes.
You must pay as little as possible so you have control of your own money. There is nothing wrong with legally reducing your tax bill.
Senior citizens have paid taxes for their entire lives. It’s time that they pay their fair share and no more. An important consideration is of course the area you want to live in. It’s the time in your life when you should not have to compromise. You wanted to live near the coast. Move to the Mississippi Gulf Coast or Florida or Texas if all of the other factors are aligned.
States that tax Social Security Benefits
| State | State Tax on Social Security Benefits | Tax Details |
|---|---|---|
| Colorado | Yes | Colorado taxes Social Security benefits to the same extent that they are taxed on your federal return. If your combined federal adjusted gross income and Social Security benefits are above a certain threshold, you may owe state taxes on your Social Security benefits. The threshold varies based on your filing status and age. |
| Connecticut | Yes | Connecticut taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $50,000 for single filers and $60,000 for joint filers. |
| Kansas | Yes | Kansas taxes Social Security benefits to the same extent that they are taxed on your federal return. If your combined federal adjusted gross income and Social Security benefits are above a certain threshold, you may owe state taxes on your Social Security benefits. The threshold varies based on your filing status. |
| Minnesota | Yes | Minnesota taxes Social Security benefits to the same extent that they are taxed on your federal return. However, there is a Social Security subtraction that can reduce the amount of benefits subject to state tax. |
| Missouri | Yes | Missouri taxes Social Security benefits for taxpayers whose adjusted gross income is greater than $85,000 for single filers and $100,000 for joint filers. |
| Montana | Yes | Montana taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $25,000 for single filers and $32,000 for joint filers. The amount of Social Security benefits subject to state tax is based on a formula that takes into account your federal adjusted gross income and Social Security benefits. |
| Nebraska | Yes | Nebraska taxes Social Security benefits to the same extent that they are taxed on your federal return. However, there is an income exclusion that can reduce the amount of benefits subject to state tax. |
| North Dakota | Yes | North Dakota taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $50,000 for single filers and $100,000 for joint filers. |
| Rhode Island | Yes | Rhode Island taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $81,900 for single filers and $102,400 for joint filers. |
| Utah | Yes | Utah taxes Social Security benefits to the same extent that they are taxed on your federal return. However, there is an income exclusion that can reduce the amount of benefits subject to state tax. |
| Vermont | Yes | Vermont taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $45,000 for single filers and $60,000 for joint filers. However, there is a Social Security subtraction that can reduce the amount of benefits subject to state tax. |
| West Virginia | Yes | West Virginia taxes Social Security benefits for taxpayers whose federal adjusted gross income is greater than $25 ,000 for single filers and $32,000 for joint filers. However, there is an income exclusion that can reduce the amount of benefits subject to state tax. |
Look at the state first then the area
If you wanted to live in the mountains of North Dakota or South Dakota, make it happen. There are lots of states where taxes and the cost of living are lower than they are in tax-heavy states such as Illinois, California, Washington, New York, and more. Find an area where you are not paying out 50% of your income for rent or a mortgage payment.
Those articles about the best states don’t have a clue about the best places in those states to live are located. The writers probably live in crowded cities and have not experienced on or near a beach or in a forest.
You have lots of options
Take a look at some of the charts above, they may help you narrow down where you may want to live. The United States is a great country with lots of options. Start the planning process well in advance of leaving your career or job. Don’t take any money out of your pension plans or you may have to pay state income taxes in your current state.
Wait until you move. States like California and New York are looking for ways to claw back money from people who did not officially move.
Wait until you are living in a fixed residence for a while or have sold your residence in the old state before you start withdrawing what would have been taxable income in your old state. You will have exposure at the federal level as ordinary income or capital gains. You can remove funds to buy that house from your Roth IRA without any penalties if you have met the requirements. Check with your financial advisor.
Ten states with the lowest tax on a gallon of gasoline
| State | Tax per Gallon of Gasoline |
|---|---|
| Alabama | 18 cents |
| Arizona | 19 cents |
| Mississippi | 19 cents |
| South Carolina | 20 cents |
| New Jersey | 20.7 cents |
| Missouri | 17 cents |
| New Mexico | 18.8 cents |
| Tennessee | 21.4 cents |
| Oklahoma | 20 cents |
| Arkansas | 21.8 cents |
If you are planning to buy a house at your new location before you leave the existing area, be sure to do so when you can provide w2 forms showing income. Your gross income must be high enough to qualify. After you move you can sell your house in the old state. It’s a good thing that some of these high-tax states have not started t charge sales taxes on the sale of homes.
Of course, if you have earned a sufficient profit on the sale of your old house, you may have to pay some amount of tax to your old state. Check with your tax professional, there may be some legal ways to manage this too.
I moved from the highest tax state
I moved to the Mississippi Gulf Coast from the highest tax state, California several years ago before it became worse on taxes and quality of life. As I have mentioned here, you can not judge an entire state by a few areas. To be fair, there are a few areas in California that have not become beacons for crime and social experiments. The state however is extremely bad at taking what’s yours.
As of 2024, the state tax rate in Mississippi (before) any deductions and allowances is 4%. This is a flat rate. California on the other hand starts at 1% on the first dollar to 12.3% then there is that millionaires tax of 13.30%. A tremendous difference.
Using the Mississippi Gulf Coast as an example in this article does not mean there are no other very good states to retire in that have low taxes and safe areas to live in. There are very few that would line up in analysis. Some states don’t tax retirement income but tax inheritance and estate income for example.
Some of the states where the herds are moving to have some great benefits, and zero state income taxes but their cost of living is growing and they are becoming overcrowded. Take Austin, TX. It was a great place to move before everyone and their brother moved there.
Think ahead, and look at their policies for the future. Are they going to issue reparations that someone has to pay for? How solvent is the state employees’ pension funds? Taxpayers must make good on politicians’ promises to keep the money coming in.
8 states with the lowest compensation for state legislatures
| State | Position | Annual Compensation |
|---|---|---|
| Alabama | State Senator | $52,752 |
| Alabama | House Member | $52,752 |
| Arkansas | State Senator | $41,396 |
| Arkansas | House Member | $41,396 |
| Georgia | State Senator | $17,342 |
| Georgia | House Member | $17,342 |
| Idaho | State Senator | $18,517 |
| Idaho | House Member | $18,517 |
| Louisiana | State Senator | $16,800 |
| Louisiana | House Member | $16,800 |
| Maine | State Senator | $15,000 |
| Maine | House Member | $15,000 |
| Mississippi | State Senator | $10,000 |
| Mississippi | House Member | $10,000 |
| New Hampshire | State Senator | $200 per two-year term |
| New Hampshire | House Member | $100 per two-year term |
The table above lists the 8 lowest-paid legislatures in the nation. Many are part-time. What this means is that the states are conservative and often legislators are working full-time jobs in the real economy to make ends meet. The taxpayers are not paying for extras and the legislators don’t have the time to stay at the capital and pass spending bills. This is not always true but I have found it a good indicator.
For example, California, New York, and Illinois have the highest-paid legislators who work full time at creating more laws that cost the economy. Looking into the future as I have mentioned, you need to see who the legislators manage the state budget.
I keep bringing up Mississippi. As of 2021 when the data was gathered, Mississippi legislators earned only $10,000 per year. This tells me they want to get the job done in the three months they are in the capital and get back to their real jobs.
Come back and read our next article on this topic which will include a checklist for you to research before you decide where to live. Subscribe to be notified when new articles are published.
Wrapping up
Thanks for reading this article. There are others of a similar nature particularly many about retirement. You may want to read our article about budgeting for retirement. Check out our blog site at RetireCoast.com
Resources
“The 10 States With the Lowest Cost of Living” by John Csiszar for U.S. News & World Report URL: https://money.usnews.com/money/personal-finance/saving-and-budgeting/articles/the-10-states-with-the-lowest-cost-of-living
The American Petroleum Institute’s (API) State Gasoline Tax Rates webpage: https://www.api.org/~/media/files/statistics/state-gasoline-tax-rates.pdf
The Tax Foundation’s Gasoline Tax Rates webpage: https://taxfoundation.org/state-gasoline-tax-rates/
The National Conference of State Legislatures (NCSL) Gasoline Taxes webpage: https://www.ncsl.org/research/fiscal-policy/gasoline-tax-rates.aspx
Alabama: National Conference of State Legislatures
Arkansas: National Conference of State Legislatures
Georgia: Georgia General Assembly
Idaho: National Conference of State Legislatures
Louisiana: National Conference of State Legislatures
Maine: Maine Legislature
Mississippi: National Conference of State Legislatures
New Hampshire: Ballotpedia
Tax Foundation: https://taxfoundation.org/state-estate-tax-state-inheritance-tax-2021/
Forbes: https://www.forbes.com/sites/ashleaebeling/2021/06/28/where-not-to-die-in-2021/?sh=2f6fcf5b5f47
Nolo: https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
And for the state income tax on social security benefits:
Tax Foundation: https://taxfoundation.org/social-security-benefits-state-taxation-2021/
Note: The data above was accurate when it was created. Things change with time. Use the links above for more current information or browse yourself. Never use informatoin from this blog without verifying it first. RetireCoast is not responsble for what you do with the data provided.
