Retirement is often seen as a time to relax and enjoy the fruits of one's labor. However, for many retirees, the question of where to settle down and enjoy their golden years can be a significant concern.
If you're on the lookout for a tax-friendly state that will stretch your retirement dollars, look no further.
In this article, we unveil the most tax-friendly states for retirees. Before you continue reading, be sure to download our free retirement cheat sheets to help you potentially save time and money in retirement.
When it comes to picking a retirement destination, taxes can play a crucial role in your financial health. Some states are notorious for being retirement havens, offering a range of tax benefits and incentives specifically tailored to retirees. From states with no income tax to those with a low cost of living (and thus lower consumption tax), we delve into the top contenders for retirees seeking a tax-friendly haven in retirement.
Join us as we dive into the details of each state's tax policies, analyzing everything from income taxes to property taxes and sales taxes.
We even adjust our findings to account for higher or lower costs of living.
Make an informed decision for your retirement and discover the states that offer the most favorable tax breaks for retirees.
Say goodbye to tax worries and embrace your retirement bliss in the most tax-friendly state for retirement that suits your needs.
Factors to consider when choosing a retirement destination
Deciding on a suitable place to retire often hinges on tax considerations, which can have a significant impact on your financial well-being. Of course, other aspects like access to healthcare services and the local weather pattern are important, but grasping the nuances of tax requirements and the cost of living in a particular region is crucial.
Choosing a state with a hospitable tax environment is something we strongly advocate for retirees and those nearing retirement—it can stretch your budget further and enhance your lifestyle.
To compile a lineup of the most benevolent tax states for retirees, we poured over information from all 50 states and the District of Columbia.
We focused our investigation on four main criteria:
Income Tax Rates (ITR)
Property Tax Rates (PTR)
Sales Tax Rates (STR)
Cost of Living Index (COLI)
In our analysis, a pivotal component was each state's income tax rates. While many states impose an income tax, a handful do not, offering a substantial benefit for retirees reliant on a steady income. In fact, the presence or absence of a state income tax was the most influential factor in our study.
For the purposes of our research, we looked at the top marginal state income tax rate using a hypothetical couple's profile—married and filing jointly with an annual gross income of $150,000. This tax rate was given a larger relative importance of 50% since it generally reflects the bulk of state taxes paid or saved.
Property tax rates, a key concern for homeowners, were also factored in with a significant weight of 26%. This metric accounts for both asset value and potential tax liability.
Next, we integrated sales tax rates into our analysis, attaching a weight of 24%. This helps identify states that can offer savings on everyday spending.
Another critical indicator in our review was the cost of living index, which assesses the value you get for each dollar you spend—a fundamental consideration when planning for retirement.
How we calculated the most tax-friendly states for retirement
The four essential criteria above were combined and scrutinized to assemble a definitive list of the most tax-beneficial states, utilizing Covenant Wealth Advisors' proprietary formula showcased below.
Tax Efficiency Score = ((Weight x ITR) + (Weight x PTR) + (Weight x STR)) x COLI Multiplier
Here's how we calculated Virginia's tax efficiency score as an example:
4.63 = ((50% x 5.75%) + (26% x 0.87%) + (24% x 5.77%)) x 1.031
This formula was applied to all fifty states plus the District of Columbia, culminating in a ranked list according to the individual scores calculated.
A smaller score in the study implies a more advantageous tax climate, while a larger score denotes a less desirable one.
It's worth noting the study's constraints when considering our rankings of most tax-friendly states for retirees:
We did not account for individual state-specific tax exemptions or deductions that could substantially decrease the tax burden.
Our analysis assumes the uniform taxation of social security benefits across all states for the sake of simplicity.
We used the projected 2024 combined state and local sales tax rates, which may vary depending on specific locales within a state.
Estate and inheritance tax ramifications were excluded from our study as they generally affect successors more than the taxpayer themselves. However, considering these factors may benefit your long-term planning.
With a clearer understanding of how we formulated our rankings, let's explore the most tax-friendly states for retirees!
Top 10 tax-friendly states for retirees
Here’s a detailed summary of the top 10 tax-friendly states for retirees, taking into account climate, income tax rates, property tax rates, sales tax rates, and the cost of living index:
New Hampshire
Climate: Characterized by cold winters and warm, humid summers.
Income Tax: No state income tax on wages, though dividends and interest are taxed.
Property Tax: 1.93% on average and ranks among the third highest in the U.S.
Sales Tax: No sales tax.
Cost of Living: Approximately 15% higher than the national average.
2. Alaska
Climate: Very cold winters and cool summers, with significant regional variations.
Income Tax: No state income tax.
Property Tax: Varies by locality and averages about 1.04% as of 2021 data. Some areas offer exemptions for seniors.
Sales Tax: No statewide sales tax, but localities may impose their own. Average local sales tax is 1.82%.
Cost of Living: 24.4% higher than average, especially due to transportation and heating costs.
3. Wyoming
Climate: Semi-arid and continental, cold winters and warm summers.
Income Tax: No state income tax.
Property Tax: Relatively low property tax rates at 0.56% as of 2021 data.
Sales Tax: 5.44% which is lower than the overall average of 6.60%.
Cost of Living: Approximately 7.2% below the national average.
4. South Dakota
Climate: Continental climate with four distinct seasons, harsh winters, and hot summers.
Income Tax: No state income tax.
Property Tax: Moderate property taxes at 1.17% with relief programs for seniors.
Sales Tax: Moderate statewide sales tax at 6.11%.
Cost of Living: 6.2% below the national average.
5. Florida
Climate: Tropical in the south, subtropical in the north. Hot summers and mild winters.
Income Tax: No state income tax.
Property Tax: Middle-range, with exemptions such as the homestead exemption for residents.
Sales Tax: Statewide sales tax plus county-level additions.
Cost of Living: Varies widely, higher in metropolitan areas. Averages about 2.4% above the national average.
6. Nevada
Climate: Mostly desert and semi-arid; very hot summers and mild winters.
Income Tax: No state income tax.
Property Tax: Relatively low property taxes at 0.91%.
Sales Tax: Higher than average sales tax rates at 7%.
7. Tennessee
Climate: Generally humid subtropical with warm summers and mild winters.
Income Tax: No wage income tax, but interest and dividends are taxed (being phased out by 2021).
Property Tax: Generally low property taxes at 0.59%.
Sales Tax: High sales tax rates at 8.24% including on groceries.
Cost of Living: Slightly above the national average by 1.3%.
8. Texas
Climate: Ranges from arid in the west to humid in the east. Hot summers and mild winters.
Income Tax: No state income tax.
Property Tax: Relatively high property tax rates at 1.68%.
Sales Tax: State sales tax with additional local taxes averaging about 8.2%.
Cost of Living: Meaningfully below the national average by 7.0%.
9. North Dakota
Climate: Continental with cold winters and warm summers.
Income Tax: Low to moderate income tax rates at 1.95% for a family earning $150,000 per year.
Property Tax: Average property tax rates at 0.98%.
Sales Tax: Moderate sales tax rates at 7.08%.
Cost of Living: 5.4% below the national average.
10. Washington
Climate: Marine west coast climate leading to mild, wet winters and warm, dry summers.
Income Tax: No state income tax.
Property Tax: Below the national average at 0.87%
Sales Tax: High sales taxes at 9.38%.
Cost of Living: High, especially in urban areas like Seattle. Currently 15.1% above the national average.
Top 10 least tax-friendly states for retirees
Based on our proprietary formula and tax study, here's a summary of the top 10 least tax-friendly states for retirees detailing their climate, income tax rates, property tax rates, sales tax rates, and cost of living index:
1. Hawaii
Climate: Tropical climate with mild temperatures year-round.
Income Tax Rates: Progressive rates from 1.4% to 11%. Top rate is 8.25% for individuals filing jointly with income of $150,000.
Property Tax Rates: Among the lowest in the U.S. at 0.32%, but offset by high home prices.
Sales Tax Rates: General excise tax of about 4.5%.
Cost of Living Index: Very high at 79% above average, particularly in housing and groceries.
2. California
Climate: Diverse, from Mediterranean to desert and coastal.
Income Tax Rates: Progressive rates from 1% to 13.3%, the highest top rate in the country. Top marginal rate is 9.30% for individuals filing jointly with an income of $150,000.
Property Tax Rates: Capped by Proposition 13 at about 0.75% of home value, but high property values escalate costs.
Sales Tax Rates: Base state rate is 7.25%, with local additions that can make it over 10%.
Cost of Living Index: High at 34.5% above national average, especially in major cities like San Francisco and Los Angeles.
3. District of Columbia
Climate: Humid subtropical, with hot summers and cold winters.
Income Tax Rates: Progressive rates from 4% to 10.75%.Top marginal rate is 8.50% for individuals filing jointly with an income of $150,000.
Property Tax Rates: Lower rates at 0.62% but high property values increase overall tax burden.
Sales Tax Rates: 6% general sales tax.
Cost of Living Index: Very high at 48.7% above national average, driven by housing and transportation costs.
4. New York
Climate: Humid continental and humid subtropical, with cold winters and hot summers.
Income Tax Rates: Progressive rates from 4% to 10.9%. Top marginal tax rate is 5.5% for married filing jointly earning $150,000 per year.
Property Tax Rates: Some of the highest in the U.S. at 1.4% on average.
Sales Tax Rates: State rate is 4%, but local rates push the average to 8.53%.
Cost of Living Index: High at 25.1% above average, particularly in New York City.
5. Massachusetts
Climate: Continental with cold winters and warm summers.
Income Tax Rates: Flat rate of 5%.
Property Tax Rates: High average rates at 1.14%, with high property values compounding the effect.
Sales Tax Rates: 6.25% state rate.
Cost of Living Index: Very high at 48.5%, especially around Boston.
6. Vermont
Climate: Humid continental, with cold winters and mild summers.
Income Tax Rates: Progressive rates from 3.35% to 8.75%.
Property Tax Rates: High, with education tax rates significantly increasing the burden.
Sales Tax Rates: 6% state rate, with some municipalities adding 1%.
Cost of Living Index: Above average, with higher food and heating costs.
7. New Jersey
Climate: New Jersey experiences a generally humid climate with cold winters and warm to hot, humid summers.
Income Tax Rates: Progressive rates from 1.4% to 10.75%.
Property Tax Rates: Highest average property tax rates in the country.
Sales Tax Rates: 6.625%, lower than many states but not offsetting other high taxes.
Cost of Living Index: High, particularly due to housing costs.
8. Connecticut
Climate: Humid continental, with cold winters and warm summers.
Income Tax Rates: Progressive rates from 3% to 6.99%.
Property Tax Rates: High property taxes with rates varying significantly by locality.
Sales Tax Rates: 6.35% state rate.
Cost of Living Index: High, driven by housing and energy costs.
9. Oregon
Climate: Mostly oceanic, with mild, cool summers and wet winters.
Income Tax Rates: Progressive rates from 5% to 9.9%.
Property Tax Rates: Moderate, but increases are capped by state law, leading to funding challenges.
Sales Tax Rates: No sales tax.
Cost of Living Index: Increasingly high, especially in Portland and surrounding areas.
10. Minnesota
Climate: Continental, with very cold winters and warm, humid summers.
Income Tax Rates: Progressive rates from 5.35% to 9.85%.
Property Tax Rates: Moderate to high, depending on the area.
Sales Tax Rates: 6.875% state rate, with some localities adding more.
Cost of Living Index: Above average, particularly in urban areas.
These states, while offering many amenities and quality of life benefits, come with a higher tax burden which can significantly impact retirees with fixed or limited incomes.
States with no income tax rates for retirees
When considering a retirement destination, it's essential to evaluate the state's income tax rates for retirees. Some states have a progressive income tax system, meaning the tax rate increases as income levels rise. Other states have a flat tax rate, which means the tax rate remains the same regardless of income. However, several states have no income tax at all, making them highly attractive for retirees.
The states that do not levy a personal income tax are:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
Tennessee (phased out income tax on interest and dividends in 2021)
New Hampshire (taxes interest and dividends, but this is set to be phased out by 2027)
Sales tax considerations for retirees
Sales tax is another important factor to consider when choosing a tax-friendly state for retirement. A higher sales tax rate can increase the cost of living, affecting retirees' purchasing power. Some states, however, have lower sales tax rates or provide exemptions for certain goods and services, making them more attractive for retirees.
Other states have a sales tax that will make a meaningful negative impact on your spending.
Top 5 states with lowest sales tax rates:
Oregon: 0.00%
Montana: 0.00%
New Hampshire: 0.00%
Delaware: 0.00%
Alaska: 1.82%
Top 5 states with the highest sales tax rates:
Louisiana - 9.56%
Tennessee - 9.55%
Arkansas - 9.45%
Washington - 9.38%
Alabama - 9.29%
Property tax exemptions and deductions for seniors
Property taxes can be a significant expense for homeowners, especially for retirees on a fixed income. However, many states offer property tax exemptions and deductions specifically tailored to seniors, making home ownership more affordable during retirement.
Hawaii: While Hawaii is known for its stunning beaches and tropical paradise, it also offers property tax benefits for seniors. The state's Senior Exemption program allows eligible seniors to receive a significant reduction in their property taxes, making it an attractive option for retirees.
Arizona: Arizona is another state that provides property tax relief for seniors. The state's Property Tax Assistance Program offers assistance to qualified low-income seniors, helping them reduce their property tax burden. With its warm climate and diverse landscapes, Arizona is a popular retirement destination for many seniors.
Delaware: Delaware offers property tax relief for seniors through its Senior School Property Tax Credit program. Eligible seniors can receive a credit against their school property taxes, reducing their overall property tax burden. With its charming coastal towns and low property tax rates, Delaware is an appealing choice for retirees.
Estate and inheritance tax implications
While we did not include estate and inheritance taxes as part of our study, they can have a significant impact on retirees' financial planning, especially for those with substantial assets. Some states impose estate and/or inheritance taxes, while others have no such taxes in place. Understanding the implications of these taxes is crucial when selecting a tax-friendly state for retirement.
States with Inheritance Tax Only
Tennessee: Tennessee does have an inheritance tax, which applies to certain beneficiaries. Retirees considering Tennessee as a retirement destination should carefully evaluate the state's inheritance tax laws to ensure they align with their estate planning goals.
Pennsylvania: Pennsylvania imposes an inheritance tax on the value of most assets that are passed to beneficiaries after someone dies. The tax rate depends on the relationship between the decedent and the beneficiary:
States with Estate Tax Only
These states impose a tax on the estate itself before assets are distributed to heirs. These taxes are based on the estate's total value, with varying exemption levels and rates.
Connecticut: The estate tax ranges from 10% to 12%, with an exemption threshold that aligns with the federal exemption.
Hawaii: Similar to federal estate tax structures, with rates up to 20% and an exemption threshold that matches the federal level.
Illinois: Taxes estates exceeding $4 million at rates up to 16%.
Maine: Has an exemption threshold of $5.8 million and a top rate of 12%.
Massachusetts: One of the lowest exemption thresholds at $1 million, with tax rates up to 16%.
Minnesota: The exemption threshold is $3 million, with rates up to 16%.
New York: Features a cliff tax mechanism; if the estate value is more than 105% of the current exemption threshold ($5.93 million), the entire estate is subject to tax, not just the amount over.
Oregon: Exempts the first $1 million, with tax rates up to 16%.
Rhode Island: Exemption threshold of $1.6 million and a top rate of 16%.
Vermont: Has an exemption threshold of $5 million, with rates ranging up to 16%.
Washington: Notably high top estate tax rate of 20%, with an exemption threshold of $2.193 million.
District of Columbia: Exemption threshold of $4 million with rates up to 16%.
States with Estate and Inheritance Tax
Maryland: Unique among states, Maryland imposes both an inheritance tax and an estate tax. The estate tax has an exemption of $5 million and a top rate of 16%. The inheritance tax, generally flat at 10%, exempts close relatives such as spouses, children, siblings, and parents. This dual system can lead to significant tax implications for estates, particularly those with non-exempt beneficiaries.
Other retirement-friendly benefits and amenities
While taxes are an essential consideration when choosing a retirement destination, retirees should also evaluate other retirement-friendly benefits and amenities offered by each state. These can include healthcare facilities, recreational opportunities, cultural attractions, and quality of life factors.
Colorado: Colorado is known for its stunning natural beauty and outdoor recreational opportunities, making it an ideal retirement destination for nature lovers. The state also offers excellent healthcare facilities and a high quality of life, ensuring retirees can enjoy their golden years to the fullest.
North Carolina: With its mild climate, beautiful coastal areas, and vibrant cities, North Carolina offers retirees a diverse range of retirement options. The state boasts world-class healthcare facilities and a thriving arts and culture scene, providing retirees with a fulfilling retirement experience.
Virginia: Virginia is another state that offers retirees a mix of natural beauty, historical attractions, and cultural amenities. The state's healthcare system is highly regarded, ensuring retirees have access to top-notch medical care. With its charming towns and close proximity to major cities like Washington, D.C., Virginia is an attractive retirement destination.
How to decide which tax-friendly state is right for you
Choosing the right tax-friendly state for retirement is a personal decision that depends on individual preferences and financial circumstances. When evaluating different states, consider the following factors:
Financial situation: Assess your financial situation and determine how taxes will impact your retirement income and assets. Consider your sources of income, such as retirement accounts, pensions, and Social Security benefits, and evaluate how each state's tax policies will affect your overall tax liability. Income tax rates, property tax rates, and sales tax rates are all important factors.
Cost of living: While taxes are important, the cost of living is also a crucial factor to consider. Evaluate the cost of housing, healthcare, transportation, and other essential expenses in each state to ensure it aligns with your budget and lifestyle.
Lifestyle preferences: Consider your lifestyle preferences and retirement goals. Do you prefer a warm climate or four distinct seasons? Are outdoor recreational opportunities important to you? Do you want to be close to family and friends? These factors can help narrow down your choices and determine which tax-friendly state aligns with your desired lifestyle.
Consult professionals: When making such an important decision, it's always wise to consult with professionals, such as financial advisors and tax experts. They can provide personalized advice based on your specific circumstances and help you make an informed decision.
Conclusion: Finding your retirement bliss in a tax-friendly state
Choosing a tax-friendly state for retirement can have a significant impact on your financial well-being and overall quality of life. By considering factors such as income tax rates, property tax exemptions, sales tax considerations, and estate and inheritance tax implications, retirees can make an informed decision that aligns with their financial goals and preferences.
Whether you dream of relaxing on Florida's beaches, immersing yourself in the natural beauty of Wyoming, or enjoying the vibrant city life of Nevada, there is a tax-friendly state that suits your retirement needs.
Evaluate the pros and cons of each state, consult professionals, and make a decision that will allow you to embrace your retirement bliss to the fullest. With careful planning and research, you can find the perfect tax-friendly state for your golden years.
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Data Disclosure:
Additional Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible but no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.