5 Tax Breaks the Best States Offer Retirees

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Deciding where to live after you retire requires balancing a host of difficult issues, ranging from wanting to be close to family and friends to seeking ideal locations for your interests. Increasingly, though, financial issues have come to the forefront in the retirement-living decision, and states looking to attract retirees offer financial incentives that smart retirees can take advantage of.

One of the biggest concerns that retirees have is making their money go as far as possible without getting eaten away by taxes. Let's look at five of the smart tax benefits that the best states give retirees to lure them to move there.

1. Low Sales Taxes
After a lifetime of amassing their nest eggs, retirees typically spend more than they get in income. As a result, sales taxes have a disproportionately large impact on retirees. Therefore states that have low sales taxes make it easier for their residents to spend more freely.

Five states have no state sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. But even in states with a sales tax, different rules apply about what purchases are subject to tax. In most states, food isn't subject to sales tax. Many states also exempt necessities like prescription drugs, hearing aids and dental prosthetics from tax. What you spend money on will define how big an impact sales taxes will have on your overall expenditures.

2. Low Income Taxes
States with no income tax typically get the most attention from retirees, even though income typically falls dramatically during retirement.

Popular retirement destinations Florida and Texas are just two of seven states with no income taxes at all, while two more -- Tennessee and New Hampshire -- impose tax only on income (such as interest and dividends) from investments.

Income tax is most important if you have substantial investment income or plan to draw money from tax-deferred accounts, including IRAs or employer-sponsored retirement plans like 401(k)s. For those with more limited incomes, state income taxes usually don't play as vital a role in a financial retirement decision.

3. Exemptions for Retirement Income
Going hand in hand with the income-tax discussion is whether a state provides income-tax exemptions for retirement-related income.

Pennsylvania and Mississippi don't impose state income taxes on Social Security or retirement-related income from any source, including both pensions and distributions from IRAs or 401(k) plans. Some other states, such as New York and Massachusetts, exempt government or military pensions but not private-sector payouts.

If you get most of your income from these sources, then income-tax exemptions open up additional living options beyond just those states that have no income tax on any of their residents. You just need to be sure that your particular income qualifies for the exemption.

4. Property Tax Breaks
If you intend to buy a home where you retire, then it's essential to consider property taxes. Given how many retirees end up house-rich but cash-poor, coming up with money to pay high property taxes can be extremely difficult.

Some states with low sales and income taxes often make up the difference with high property taxes. New Hampshire, for instance, collects the fourth most property-tax revenue in the nation, with taxes of $2,463 according to figures from the Tax Foundation.

On the other hand, most states offer property tax exemptions or breaks targeted to retirees and other elderly homeowners. For instance, in Nevada, those over age 62 under certain income limits can get rebates of up to 90 percent of their property taxes.

5. No or Low Estate and Inheritance Taxes
One issue many people neglect to consider is the impact on their families of dying in a certain state. Even if you don't have the more than $5 million in assets necessary to trigger federal estate tax, many states impose estate taxes on smaller amounts, and others have inheritance taxes that force family members in some cases to pay taxes on what they receive after your death.

New Jersey is a particularly egregious example of these taxes. The state imposes inheritance taxes of 11 percent to 16 percent on property passing to those other than spouses, descendants, parents or grandparents or charities. Moreover, estate taxes of up to 16 percent apply to estates of $675,000 or larger, although inheritance taxes are credited against the estate tax to avoid double taxation.

Watch Out
With so many financial issues to consider, it can be hard to compare the total tax cost of living in one state versus another. The key, though, is to understand all the potential tax pitfalls, so that you can at least make a good-faith guess about how your finances will play into your decision on where to live when you retire.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google Plus.

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"New Hampshire. with Property taxes of $2,463". That's high?? Hope they're talking about half year taxes. My mother's $170,000 condo in Delaware County Ohio, is taxed at $3,200 a year!!

September 10 2013 at 7:13 PM Report abuse rate up rate down Reply

It is criminal that people are taxed on Social Security when they retire. The government confiscated the money the whole time the people were working then they tax them on it!!! Anyone who could not have gotten a bigger return on that money than they will get from the government is a dimwit.

September 10 2013 at 7:11 PM Report abuse rate up rate down Reply
green gate farm

No State is perfect, but nowhere could be worse than Connecticut. I will have to leave this State when I retire. No tax breaks on anything and they tax everything.

September 10 2013 at 5:25 PM Report abuse rate up rate down Reply

put it in the bank you can get a .004% interest rate and its taxed lmao

September 10 2013 at 4:54 PM Report abuse rate up rate down Reply

Everything is relative, and I guess it depends on your financial situation. Long Island, New York is a great place to live, but, high property taxes, state income tax, and other things like $3.70 a gallon for heating oil make it very expensive. On the other hand, in Florida there is no state income tax, property taxes are lower, and so is the cost of homes, but, the conservative run state and low property taxes make for a lack of good social services, and homeowner insurance is very high as well as electric bills due to the heat and humidity. Water is also very expensive in Florida.

September 10 2013 at 1:52 PM Report abuse +1 rate up rate down Reply

Time for all retiree's to move from Michigan! We don't get any tax breaks and our "wonderful" governor wants to tax everything and tax it more! We should all leave the state and let him have it all to himself!

September 10 2013 at 1:35 PM Report abuse -3 rate up rate down Reply
1 reply to Kay's comment

I live in Michigan and find your claim to be totally misleading. My wife and I are retired living on modest pensions and SS and pay no State income tax.

September 10 2013 at 3:58 PM Report abuse +1 rate up rate down Reply

Many great comments, I'm ten years out to retirement, I always thought Nevada was the place to go. Sales tax is high. However state income tax is low. I just want to be somewhere that the kids will want to visit, and I wouldn't mind being the vacation dad guy. I guess if you live in Las Vegas everyone will visit, like it or not. Reno seems a better place. However I still got a few years to decide.

September 10 2013 at 12:59 PM Report abuse +2 rate up rate down Reply
1 reply to Mark's comment


September 10 2013 at 4:28 PM Report abuse rate up rate down Reply

I looked at Panama which is a 3rd world conuntry. Panama City had open sewers running down the side of the road. Out at David power outage is common, and you have no rights on anything. If you want to hide out and live like the natives then maybe this is the place to go. Everyone is after the American dollar,

September 10 2013 at 12:50 PM Report abuse rate up rate down Reply
1 reply to dalemorr's comment

Apparently you haven't spent much time in Panama. Granted, I wouldn't live near Panama City, nor would I live in any large city anywhere). Actually, David, in the North, is a beautiful area. Take the train around the country. You just might fall in love with it as so many U.S. retirees have.

September 10 2013 at 1:15 PM Report abuse +2 rate up rate down Reply
Frank Werker

Indiana does not tax Social Security. It does tax my company pension, plus any investment income and 401K withdrawals.

September 10 2013 at 12:36 PM Report abuse rate up rate down Reply

I've been investigating buying my retirement home in Panama. If you want low taxes, excellent health care, and a government that hasn't been contaminated like D.C., investigate Panama.

September 10 2013 at 12:28 PM Report abuse +4 rate up rate down Reply
1 reply to lscha99034's comment

My question would be... isn't your income earned here in the US? So wouldn't income taxes be paid before you receive your check?

September 10 2013 at 5:13 PM Report abuse rate up rate down Reply