Taxation of Retirement Income
Tax & AccountingMarch 09, 2021

Finding a Tax-friendly State for Retirement

(NEW YORK, NY, March 2021) — A variety of factors play a role in where retirees choose to spend their golden years. These factors can include:

  • climate
  • family and friends networks
  • healthcare costs and options
  • real estate, grocery, gasoline, and other basic living costs
  • transportation options
  • relocation costs 

But retirees shouldn’t overlook the impact state taxes can have on their retirement nest egg. Specific taxes to consider include: 

  • state taxes on Social Security and retirement or pension benefits
  • state income tax rates
  • state and local sales tax
  • state and local property taxes
  • state estate taxes

How Do States Tax Retirement, Pension, and Social Security Income?

Tax treatment of retirement, pension, and Social Security benefits varies widely from state to state. Some states:

  • impose no income tax on retirement or other income
  • exempt all or some retirement or Social Security income
  • provide credits for retirement income
  • tax all retirement income

Individuals determine income tax liability in most states by starting with their federal adjusted gross income (AGI). So, taxpayers start with the amount of Social Security income or other forms of retirement income included in federal AGI before any state adjustments.

What States Do Not Tax Retirement Income?

7 states do not tax individual retirement or other income:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

2 states tax only dividend and interest income:


  • New Hampshire
  • Tennessee

4 states exempt all or most retirement income:

  • Alabama
  • Hawaii
  • Illinois
  • Mississippi

What States Tax Some Retirement Income?

21 states tax some, but not all, retirement or pension income. Many of these states limit the exemption amounts based on AGI thresholds:

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

3 states provide a credit for retirement or pension income:

  • Ohio
  • Oregon
  • Utah

What States Tax All or Most Private Retirement Income?

13 states and the District of Columbia tax all or most private retirement or pension income:

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

What States Tax Social Security Income?

13 states tax some or all Social Security income. Most of these states exempt a part of this income based on AGI thresholds.

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

What States Made Retirement Income Changes Over the Last Year?

  • Nebraska: Increased the military retirement income exclusion from 40% to 50% of that income beginning after the 2021 tax year

What Are Some Other State Retirement Tax Considerations

Of course, tax treatment of retirement income isn’t the only tax consideration to think about. What a state loses in revenue by providing favorable treatment to retirement income, it can make up by relying on more revenue from:

  • higher income tax rates
  • sales and use taxes
  • property taxes
  • estate taxes
  • fees

State income tax ratesIncome tax rates can have a significant financial impact on retirees in determining where they want to live. The rates can differ widely across the country.

  • California, the District of Columbia, Hawaii, Iowa, Minnesota, New Jersey, New York, Oregon, and Vermont impose the highest rates on the top income tax brackets (more than 8%)
  • Arizona, Colorado, Illinois, Indiana, Michigan, New Mexico North Dakota, Ohio, Pennsylvania, and Utah impose the lowest rates (less than 5%)

State and local sales taxes: 45 states and the District of Columbia impose a sales and use tax. States with relatively high state sales tax rate(7% or more) include California, Indiana, Mississippi, Rhode Island, and Tennessee. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.

State and local property taxes: High property taxes can strain the limited resources of retirees. Fortunately, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also apply to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.

State estate taxes: Most states no longer impose an estate tax. Estate tax exemption amounts vary in states that continue to impose the tax. Examples of 2021 exemption amounts include:

  • $7.1 million in Connecticut
  • $5.49 million in Hawaii
  • $4 million in Illinois
  • $1 million in Massachusetts
  • $5.93 million in New York

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Tim Bjur, PD
Senior Content Management Analyst
Tim Bjur is an attorney and senior content management analyst for Wolters Kluwer Tax & Accounting, who has spent the last 18 years analyzing state income tax legislation, case law, and regulatory developments. He offers a detailed understanding of state personal and corporate income taxation and trends across all states and has been quoted in top media publications, including Forbes and CNBC.
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