Taxes come in a lot of different places and the cost of living has a lot of variables in it. As you plan to retire, it’s only normal to cut costs by searching for tax-friendly states to retire. Many retirees are paying attention to the taxes levied on them in the states they live in, especially now that the cost of living has risen.
Choosing to live in a tax-friendly state can make a big difference in helping your retirement savings last longer. You spend 30 to 40 years saving for retirement so that you can be well off for the rest of your life and ensure you won’t be a burden on society. The last thing you want is the IRS taking up what you have spent decades saving because you no longer work.
Now that the largest Social Security Cost of Living boosts in 40 years could result in an unwelcome reality of higher taxes for retired Americans who are already weighed down by inflation, choosing the best tax-friendly states to retire is important.
From social security to cost of living, weather, pension income, the primary source of income, level of income, and retirement account, a lot of factors come to play when it comes to choosing a tax-friendly state to retire to.
To help you make an informed decision about tax-friendly states to retire from, check out these best states to retire to. These states exempt Social Security benefits paid to seniors from state income taxes. Most of these states also allow an exemption for potential retirement incomes such as IRA withdrawals, or private pensions. They also tend to have low or reasonable sale tax rates and property tax rates. Check out the states below:
Delaware
Delaware is one of the most tax-friendly states to retire without sales tax, no death taxes, and low property taxes, it’s no wonder why senior citizens love retiring in the state. Because the property taxes are very low, and there is no personal property tax on your automobile, RVs, or boats you’ll have more money for yourself and your family. In addition, residents age 60 and above can exempt up to 12,500 of their retirement income from taxes.
Hawaii
The tropical Island has only a 1.4% state income tax range. It also has one of the lowest average local and state tax burdens for retirees in the country. Retirees can enjoy a completely tax-free Social Security benefit. Employer contributions to retirement income such as the 401K are also exempt from taxes. Hawaii imposes a low sales tax rate of 4%, but localities can include as much as 0.5%. Note that most things are taxable in Hawaii, so residents end up paying above the low sales tax rate.
Colorado
With a state income tax range of 4.4%, Colorado offers many amazing tax benefits for retirees making it one of the most tax-friendly states to retire. Colorado has no estate or inheritance and a median property tax rate of $485 per $100,000 of assessed home value. It has a low sales tax rate of only 2.9%(flat tax), but local government can take as high as 8.3% which makes the combined local and state sales tax rate above the national average.
Wyoming
The state is known to be one of the top most tax-friendly states for middle-class families and it’s no surprise. With a combination of zero income, estate, and inheritance taxes, Wyoming is a great state to retire. Added to this is the low sales tax with an average combined local and state sales tax of just 5.36% which makes it the eighth-lowest combined sales tax rate in the US. also, for a $250,000 home, the statewide average annual property tax bill in Wyoming comes to only $1,363.
Nevada
The Silver State offers retired citizens a truckload of tax savings as one of the best tax-friendly states to retire. First, there’s no state income tax neither are there estate or retirement taxes. Nevada also has the third-lowest median property tax rate in the country, although the sales tax rate is on the high side with a 6.85% tax and an additional estimate of 1.53% more for countries. This sums up the combined state and local sales tax rate to 8.23%, making it the 13th highest combined sales tax rate in the U.S
South Carolina
Apart from its welcoming Southern hospitality, South Carolina is also known for its tempting collection of income tax breaks which makes it a suitable state for retirement, making it one of the most preferable tax-friendly states to retire. In addition to the Social Security benefit exemption, taxpayers aged 65 and above can exclude up to $10,000 of their retirement income ( up to $3,000 for taxpayers below 65). Senior citizens can also deduct up to $15,000 of retirement income (up to $30,000 for joint filers). The lower property tax rate of $1,295 on a $250,000 home and the lack of an estate or inheritance tax also make it a desirable state to retire.
District of Columbia
Although the cost of living in the state is high, but like other tax-friendly states for retirement, Washington D.C. does not tax Social Security payments. Instead, other forms of retirement income such as 401K and IRAs are taxed. The median property tax rate in the District of Columbia is $564 per $100,000 of assessed home value, but homeowners can also qualify for an income tax credit for property taxes worth up to $1,250 for the 2022 tax year, which can significantly reduce their tax bill.
Arizona
The grand canyon state excludes Social Security benefits and military retirement income from the state income taxes and provides up to $2,500 of income from federal and Arizona government retirement plans. With a two-bracket tax rate structure (2.55% and 2.98% for 2022), income tax rates in the states are relatively low for most retirees. However, starting in 2023, Arizona will adopt a flat rate of 2.5%. The average local and state tax rates stand at 8.4% while the average effective property tax rate is 0.51%
Also, homeowners that are 65 and older can freeze their property value for three years for real estate tax purposes. Retirement income is either partially or fully taxed, but income from the pension is eligible for a deduction.
Idaho
At a glance, the mountainous western state might not look like one of the best tax-friendly states to retire at a glance, but it offers a lot of tax benefits for retirees. Idaho taxes all income except Railroad retirement benefits and Social Security. However, in addition to its low cost of living, its property taxes which are at $492 per $100,00 of home value, and sales taxes which are pegged at 6% are relatively low. There are also no estate or inheritance taxes in Idaho. Although retirement saving accounts such as the 401K and IRAs are fully taxable within the range of 1.00% and 6.00%, income from public pensions may qualify for a deduction for taxpayers that are 65 and older or anyone that is at least 62 and disabled. Other forms of retirement saving accounts are also taxed at a rate between 0.00% to 6.00%.
Tennesse
Residents in Tennessee enjoy zero taxes on Social Security Benefits, pensions, and distributions from their retirement plans because Tennessee is one of the few states with no state income tax. There is also no estate or inheritance tax as its estate tax expired in 2016, thus putting both retirees and their heirs at ease. Property tax is also on the low end in the state. The average effective property tax rate in the state is 0.56% which is the 14th lowest in the country. Most homeowners in Tennessee pay about $1,300 for property taxes annually. Tennessee also provides property tax relief to senior and disabled homeowners.
If you or your loved ones are planning to choose one of the best tax-friendly states to retire and you have any questions about specific tax situations or retirement options, don’t hesitate to get in touch with us at Tax Goddess!
