If given the choice, would you rather not pay taxes? That’s not a real choice, of course. Regardless of where you live or your level of income, taxes are a part of life, be it sales tax, property tax, or income tax. However, for retirees, there are some states in the U.S. that significantly ease the tax burden by not taxing retirement income at all. This policy could result in substantial annual savings, potentially amounting to thousands of dollars, for those who live in or move to these states. Additionally, depending on the structure of your retirement income, other states might also prove to be tax-friendly.
Let’s delve into the specifics that might inspire you to consider relocating.
Nine States with No Income Tax
Among the 13 states that don’t tax retirement income, nine of them stand out because they don’t impose any income tax on anyone, regardless of their employment status. These states manage to generate revenue through other means such as tourism or natural resource industries. The nine states with no income tax are:
- Alaska
- Florida
- Nevada
- New Hampshire*
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
*Note: New Hampshire doesn’t tax wages but does tax interest and dividends over $2,400 per year until 2024. This tax will be eliminated starting in 2025.
In these nine states, retirement income from sources like 401(k) distributions, IRAs, and pensions is not taxed. Furthermore, if retirees choose to continue working, their work-based income won’t be subject to state income tax either, although it will still be subject to federal taxes.
Four States That Don’t Tax Retirement Income
In addition to the nine states with no income tax, four more states don’t tax retirement income from 401(k) accounts, IRAs, and pensions, although they do tax ordinary earned income. These states are:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
In these four states, retirees need to meet specific criteria to qualify for the tax exemption on retirement income, typically related to reaching a certain age. These criteria aren’t particularly stringent but vary slightly by state, so it’s advisable to consult the respective state’s tax authority for detailed requirements.
Other State Taxation Considerations for Retirees
While retirement accounts and pensions are significant components of retirement income, Social Security benefits also play a crucial role. Fortunately, the majority of states do not tax Social Security income. The states that do tax at least a portion of Social Security benefits include:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
It’s important to note that several of these states are planning to phase out the taxation of Social Security benefits. If you’re not yet retired, it’s worth considering these states for future relocation to minimize tax liability.
For those whose retirement income largely comes from traditional pension plans, such as government pensions, the tax scenario is generally less favorable. Most states tax at least some pension income. However, 17 states offer relief by not taxing pension income at all. These states are:
- Alabama
- Alaska
- Florida
- Hawaii
- Illinois
- Iowa
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- Rhode Island
- South Dakota
- Tennessee
- Texas
- Vermont
- Washington
- Wyoming
In nine of these states, pension payments are untaxed simply because there is no state income tax.
Military Retirement Pay
For those receiving military retirement pay, the tax situation is more favorable. Most states that impose income tax exempt military retirement benefits from taxation. Of the 16 states that do tax military retirement pay, 11 only tax a portion. The five states that fully tax military retirement income are California, Montana, Rhode Island, Utah, and Vermont.
Something to Think About
While some states offer significant tax relief to retirees, it’s crucial to remember that federal taxes remain a constant. You can’t avoid federal taxes, although there is a modest federal tax break on a portion of Social Security benefits. Additionally, while certain states may offer a lower overall tax burden, the cost of living in these states might be higher than where you currently reside. Therefore, it’s essential to consider all factors and crunch the numbers carefully if you’re contemplating a move.
Every bit of tax relief helps, especially in retirement. Saving a few thousand dollars annually by living in a state with no tax on retirement income could significantly impact your quality of life. So, if you find a state that offers both a high quality of life and tax savings, moving there could be a wise decision.
