While federal taxes get most of the attention, it’s often the tax laws in your specific state that can have the biggest impact on your retirement budget. Where you choose to live can mean a difference of thousands of dollars in your pocket each year. This guide explores the diverse landscape of state taxes for seniors, from income and Social Security taxes to property and estate taxes.
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The Gold Standard: States with No Income Tax
For retirees looking to maximize their income, the most attractive states are often those with no state income tax at all. This means your Social Security, pension, and 401(k)/IRA withdrawals are not taxed at the state level.
The states with no state income tax are:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
Note: New Hampshire doesn’t tax earned income but does tax interest and dividends, while Washington has no general income tax but does have a capital gains tax for high earners.
The Big Three of State Retirement Taxes
For states that do have an income tax, their friendliness to retirees depends on how they treat three key income sources.
1. How States Tax Social Security Benefits
The vast majority of states do NOT tax Social Security benefits. This is a huge relief for many retirees. However, as of 2025, a minority of states still tax these benefits to some extent, often depending on your income. These states include Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. This list changes, so always verify with the state.
2. How States Tax Pensions and 401(k)/IRA Withdrawals
This is where state laws vary the most. Some states are incredibly generous. For example, Illinois, Mississippi, and Pennsylvania completely exempt most retirement plan income from state taxes. Many other states offer significant deductions or exclusions for pension and retirement income up to a certain limit.
3. How States Tax Other Investment Income
In states with an income tax, income from interest, non-qualified dividends, and capital gains is typically taxed as regular income, though some states may offer special rates or deductions.
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It’s Not Just About Income Tax: The Complete Picture
A truly “tax-friendly” state has a low overall tax burden. You must also consider these taxes.
Property Taxes
This is a major expense for senior homeowners. Be aware that some states with no income tax (like Texas and New Hampshire) have some of the highest property taxes in the nation. Conversely, some states with an income tax offer robust property tax relief for seniors, often called “homestead exemptions” or “circuit breaker” credits, which can significantly lower your bill.
Sales and Excise Taxes
These taxes affect your daily cost of living. A state’s combined state and local sales tax rate can have a real impact on your budget for groceries (in some states), clothing, and other goods.
The Final Piece: State Estate and Inheritance Taxes
While the federal estate tax exemption is very high, a number of states have their own estate or inheritance taxes with much lower exemption amounts. An estate tax is paid by the estate itself, while an inheritance tax is paid by the person receiving the inheritance. If leaving a tax-efficient legacy is important to you, choosing a state without these taxes is a critical part of your plan.
Disclaimer: This article is for informational purposes only and is not a substitute for professional tax or financial advice. State tax laws change frequently. Please consult with a qualified professional and verify information with official state sources before making any financial decisions.
