Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.

Don’t settle.

Live the retirement you want.
Get a free review of your retirement strategy today.
Daily Capital
Home>Daily Capital>Retirement Planning>States That Don’t Tax Retirement Income

States That Don’t Tax Retirement Income

Most retirement savers tend to focus on how much money they’re putting away for retirement and how much their investments are earning. These are certainly important factors when it comes to planning for a financially comfortable retirement.

But there’s another critical, often overlooked, factor that’s just as important: taxes. Different states tax retirement, pension and Social Security income differently. There are also big differences in how states assess sales and use taxes and how localities assess sales and property taxes, especially on residential real estate.

These differences in taxation could have a big impact on your retirement finances, especially when it comes to how long your retirement nest egg lasts. So it’s a good idea to do some research into state taxation before deciding where you’ll spend your golden years.

State Taxation of Individual Income

There are currently seven states in which individual income is not subject to tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. In two other states — New Hampshire and Tennessee — only dividends and interest are subject to state taxes.

The tax treatment of retirement income varies considerably in all the other states. For example, 401(k), IRA and pension income is exempt from state tax in Illinois, Mississippi and Pennsylvania. In Alabama and Hawaii, pension income is exempt from state tax but income from 401(k)s and IRAs isn’t.

A number of states exempt or provide a credit for a portion of pension income — they include:

  • Alabama
  • Arkansas
  • Colorado
  • Delaware
  • Georgia
  • Hawaii
  • Iowa
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Michigan
  • Missouri
  • Montana
  • New Jersey
  • New Mexico
  • New York
  • Ohio
  • Oklahoma
  • Oregon
  • Rhode Island
  • South Carolina
  • Utah
  • Virginia
  • Wisconsin

The state income tax rate is another important consideration. In Arizona, New Mexico, North Dakota and Ohio, for example, marginal income tax rates are below 5 percent. Colorado, Illinois, Indiana, Michigan and Pennsylvania, meanwhile, each have flat tax rates below 5 percent.

Conversely, the highest state income tax rates are in California (12.3%), Hawaii (11%), New York (10.9%), New Jersey (10.75%), the District of Columbia (10.75%), Oregon (9.9%), Minnesota (9.85%), Iowa (8.53%) and Wisconsin (7.65%).

State Taxation of Pension and Social Security Income

Meanwhile, 13 states and the District of Columbia fully tax pension income:

  • Arizona
  • California
  • Connecticut
  • Idaho
  • Indiana
  • Kansas
  • Massachusetts
  • Minnesota
  • Nebraska
  • North Carolina
  • North Dakota
  • Vermont
  • West Virginia

And 13 states also tax Social Security income:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Some of these states that tax Social Security income provide tax breaks for low-income couples and individuals. Also, West Virginia started phasing out state taxation of Social Security benefits starting in 2021.

State, Local Sales and Use Taxes

State income taxes aren’t the only taxes that can affect your income in retirement. State sales and local sales and use taxes can also take a bite out of your retirement finances. All states and the District of Columbia impose these taxes except Alaska, Delaware, Montana, New Hampshire and Oregon.

The highest state sales taxes are in California (7.25%), Indiana, Mississippi, Rhode Island and Tennessee (7.0% in each). On the flip side, the lowest state sales taxes are in Colorado (2.9%), Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming (3.0% in each). Local sales and use taxes, meanwhile, are assessed by cities, counties and special taxing jurisdictions. These vary widely all across the country.

State and Local Property Taxes

State and local property taxes are another important factor to consider. The biggest property tax paid by most retirees is the annual tax paid on the value of their home. However, some states and local jurisdictions offer property tax exemptions, credits and abatements to retirees, such as an exemption from paying the school tax portion of their property taxes.

Next Steps for You

Retirement tax planning can be complicated and the details vary from one individual or couple to the next. So be sure to talk to your tax advisor and personal financial planner for guidance in your specific situation.

Managing your tax situation is a year-round — and life-long — endeavor. You can take a few actions now to get yourself on the right track.

  1. Download 5 Tax Hacks for Investors, an actionable guide with insights from fiduciary financial advisors. The guide is free.
  2. Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all of your accounts in one place, analyze your spending, and plan for long-term financial goals.
  3. Consider talking to a fiduciary financial advisor for more detailed guidance on your tax optimization strategies.

Get Started with Personal Capital

Personal Capital compensates Don Sadler (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Don Sadler is a freelance writer who specializes in business and finance. Learn more at donsadlerwriter.com.
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Ask Us Anything
Close

We want to hear from you.

What finance question is burning a hole in your pocket?

Thank you for sharing what’s on your mind!

Our team will be in touch shortly.