Taxation of Retirement Income
Tax & Accountingmarço 09, 2022

Finding a Tax-friendly State for Retirement

Wolters Kluwer Outlines State Tax Considerations for Retirees

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?

8 states do not tax individual retirement or other income:

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

New Hampshire imposes a tax only on dividend and interest income.

4 states exempt all or most retirement income:

  • Hawaii
  • Illinois
  • Mississippi
  • Pennsylvania

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
  • District of Columbia
  • Idaho
  • Indiana
  • Kansas
  • Massachusetts
  • Minnesota
  • Nebraska
  • New Mexico
  • North Carolina
  • North Dakota
  • Vermont
  • West Virginia

What States Tax Social Security Income?

12 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
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

What States Made Retirement Income Changes Over the Last Year?

  • Connecticut: Established a schedule to provide a deduction for all income received from individual retirement account (IRA) distributions by the 2026 tax year. This deduction corresponds to a phase-out schedule for income received from other private pension and annuity plans
  • Colorado: Eliminated the cap on deductible Social Security benefits for tax years beginning after 2021
  • Arizona, Missouri, Nebraska, and North Carolina: Created exemptions or deductions for all military retirement income and benefits
  • Nebraska: Initiated plans to provide an exemption from personal income tax for all Social Security income after the 2029 tax year
  • New Jersey: Changed the retirement income deduction from a dollar limit to a percentage limit based on filing status and increased the AGI eligibility threshold from $100,000 to $150,000. The changes apply to tax years beginning after 2020
  • North Dakota: Expanded a deduction for Social Security income to all benefits included in federal AGI for tax years beginning after 2020
  • Utah: Enacted a credit for Social Security and military retirement income beginning after the 2020 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, 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 rates (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, like 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 2022 exemption amounts include:

  • $9.1 million in Connecticut
  • $5.49 million in Hawaii
  • $4 million in Illinois
  • $1 million in Massachusetts
  • $6.11 million for New York

Source: Wolters Kluwer CCH® AnswerConnect, 2022
Permission for use granted.

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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