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These 6 States Tax Retirees the Hardest

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Having to deal with paying both federal and state income taxes is bad enough. But when you're retired and living on a fixed income, having to pay taxes on your Social Security and pension benefits is almost an insult.

The vast majority of states give retirees a break when it comes to their taxes, exempting much or all of their Social Security and pension income. But according to figures from Wolters Kluwer and CCH as well as the Retirement Living Information Center, a small number of states give retirees much more limited tax breaks on their retirement income, generally taxing both Social Security and pension income. Let's look at six states that hit retirees hard at tax time.

6. North Dakota
North Dakota has generally low tax rates, ranging from 1.51% at the lowest bracket to a maximum of 3.99%. With relatively low sales tax rates of 5% and an average property tax liability of about $1,025 per person, North Dakota's taxation of retirement income adds only marginally to a reasonable tax burden for retirees. Retirees may also be eligible for a homestead credit against property taxes. Moreover, with energy companies Continental Resources (NYSE: CLR  ) , Kodiak Oil & Gas (NYSE: KOG  ) , and Whiting Petroleum (NYSE: WLL  ) cashing in on Bakken riches, they'll be sending more tax revenue into state coffers, potentially allowing the government to give retirees further breaks in the future.

5. West Virginia
West Virginia generally taxes Social Security to the same extent that it's includable in federal taxable income, and certain amounts of retirement income are eligible for exclusion depending on filing status. West Virginia has five tax brackets that go from 3% to 6.5%. But with rock-bottom per-capita property taxes of less than $750, the overall tax burden for residents is less than in many other states that tax Social Security and pension income.

4. Nebraska
Like West Virginia, Nebraska treats Social Security as taxable in the same way that federal tax law calculates taxable Social Security income. Nebraska's four tax brackets range from 2.56% to 6.84%. Property taxes of nearly $1,500 per person put the state in the top third in the country, and a 5.5% sales tax also puts a burden on retirees.

3. Rhode Island
Rhode Island taxes Social Security in the same way that federal law does and includes pension income fully. Rhode Island's tax rates come in three different brackets of 3.75%, 4.75%, and 5.99%. Yet even though those rates are lower than Nebraska's, a 7% sales tax and an average property-tax burden of nearly $2,100 are enough to make the overall impact on typical retirees somewhat harsher.

2. Minnesota
Minnesota has three tax brackets ranging from 5.35% to 7.85% and taxes Social Security to the same extent the federal government does. The state taxes pension income even if the pension was earned outside the state. Property taxes averaging more than $1,400 per person and sales taxes of 6.875% also rank in the top half of the nation, making the potential hit on retirees even larger.

1. Vermont
Unlike most other states, Vermont taxes Social Security fully and has no exemptions for retirement income except for Railroad Retirement benefits. Vermont's tax rates are the highest among these six states, with a low bracket of 3.55% giving way to four higher brackets from 6.8% to 8.95%. Moreover, with property taxes of nearly $2,200 per person and a 6% sales tax, Vermont doesn't give retirees much of a break in other areas of taxation, either.

A taxing proposition
Of course, state income taxes are only one small part of the living expenses that retirees have to pay, and for many of these states, overall costs of living are well below the national average. Nevertheless, forcing retirees to bear the same or nearly the same tax burden on their retirement income as workers pay on their wages and salaries is a practice that most states have given up on, and retirees in these few holdout states need to be aware of the tax consequences that their choice of residence will have on their finances.

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Read/Post Comments (21) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 20, 2013, at 10:44 AM, greyhound44 wrote:

    I cannot imagine living in any of those states, let alone the USA!

    ret expat (since 2003) MD

    San Miguel de Allende, Gto., MX

  • Report this Comment On April 20, 2013, at 11:17 AM, DieselOwner wrote:

    Taxing retirement payments is just ridiculous, after having worked, like in my case for close to 30 yrs, having paid and paid and paid... taxes all my life, the governments in those states would do well to realize that retirees will flee. Eventually, after selling the house, I too will say adios.

  • Report this Comment On April 20, 2013, at 11:47 AM, peanutbutterpat wrote:

    I want police, firemen, road crews, and the library to be available even when I am retired. I will pay my taxes.

  • Report this Comment On April 20, 2013, at 12:45 PM, H8neocons wrote:

    Wait until they start paying for the personhood legislationi in North Dakota if you think it's bad now.

  • Report this Comment On April 20, 2013, at 12:48 PM, H8neocons wrote:

    Anyone calling a Vermont a commie state that cannot spell the word "there" certainly had no use for education.

  • Report this Comment On April 20, 2013, at 1:10 PM, PeterGone wrote:

    Has anyone seen the tax structure in Oregon? In my mind, it is worse than any other. And I might add, so is the governor.

  • Report this Comment On April 20, 2013, at 1:11 PM, paulc2013 wrote:

    Where is TEXAS?

    Texas makes up for the lack of state income tax by hitting you extra hard on property tax. That property tax does NOT disappear when you retire and go on fixed income.

    Depending on the county, those property taxes in Texas can be brutal. Don't let anyone tell you otherwise. There is no such thing as a "free ride".

  • Report this Comment On April 20, 2013, at 2:15 PM, BigDadd55 wrote:

    Are you people kidding me? Californian's wish their tax burden were so reasonable. Though California does not tax social security retirement income, the state lays a 9% assault on all other retirement pensions. Add this to a 9% sales tax and property taxes that run $2500 for a measly 5700 square foot lot and you can understand why it is next to impossible to retire and stay afloat in this broken state.

  • Report this Comment On April 20, 2013, at 3:59 PM, meeeto wrote:

    You forgot Michigan Under the republicans and the governor Snyder the Snake started taxing retirement and they real hit you hard if your a disable veteran,,,, All to give BIG tax rebates to their business partners!!!

  • Report this Comment On April 20, 2013, at 4:32 PM, miscrepancy wrote:

    Whoever came up with the $2,100 average property tax figure for Rhode Island has their head buried in the sand. I live here. We are taxed on EVERYTHING AND ANYTHING. I wish my property tax was $2,100 - it's 4x that amount. And I am not a wealthy person.

  • Report this Comment On April 20, 2013, at 5:18 PM, paulc2013 wrote:

    In Texas I was paying almost 7500/year on a 240K home in Fort Bend County. Here in Colorado I pay 2200/year on a 325k home. Of course, I also pay state tax of 5% in CO. But when your income drops, you are better off.

  • Report this Comment On April 20, 2013, at 5:42 PM, Dadw5boys wrote:

    I bought a place along a 4 lane where a business had operated for over 30 years but sat empty the owners sick and old. I tried to open a busines and the county shut me down they wanted to move traffic thru there and rezoned it residental. I was stuck with a commerical building in a residental zoning and I piled all kinds of junk there just to make it uglyyyyyy.

    Then went to the county office all my denial for a business in hand and forced them to lower my taxes from $1,480 a year to 460.00 and I have not cleaned it up yet. I opened for 6 weeks and was turning over $3,500 a week just selling veggies. They hurt me big time.

  • Report this Comment On April 20, 2013, at 5:49 PM, PeterGone wrote:

    Here in the Blue state of Oregon, we have no sales tax but we have an income tax that makes California's seem small. But we have a rainwater runoff tax on top of two city taxes. Not to mention a city gas tax. Their theam is if you can see it or smell it, tax it. Plus they are putting another tax on the next ballot for more taxes, or I should say fee's. They think if they change the definition we won't notice it. And I haven't mentioned the property tax. I pay almost $3000 per year on a $230,000 house.

    I was going to sell it, but they are putting an 8% tax on the sale price. So now I can't afford to stay here and I can't afford to sell it.

  • Report this Comment On April 20, 2013, at 9:28 PM, peterwolf wrote:

    Uh...where is California?? It's a retirement hell. That is why retired people are fleeing droves to Nevada, Arizona, Texas, Washington State, the Carolinas, etc. Only the ultra wealthy retirees are staying herre.

  • Report this Comment On April 20, 2013, at 10:11 PM, ibuildthings wrote:

    You can usually see where your tax money is going, and decide if the return on your money is worth living there. I have lived in a few places. California used to be a nice place, but now has has 30% of the entire nations' welfare, plus a huge gang and violence problem. Taxes, crime and poverty all through the roof, and their state and big city governments are pushing more of the same policies that got them where they are. The state still has a few nice parts, but the safe and gentle places are paying through the nose to support the unsafe and violent places. Not worth it.

  • Report this Comment On April 20, 2013, at 11:07 PM, ibuildthings wrote:

    If California politicians had the right answers, why are their taxes, crime and dependency on social programs through the roof? Why is the economy in such sad shape? Taxes are higher than ever before there, and the state is a mess.

  • Report this Comment On April 21, 2013, at 8:14 AM, jtst16 wrote:

    I really wish everyone would stop using the term "fixed income". Unless you are in sales or some other occupation where you collect commissions, just about everyone is on a fixed income. I get the same amount of pay twice per month. Typically it goes up once per year at somewhere near the CPI. That seems pretty fixed to me.

    Now, I truly sympathize with all of you posting here except for greyhound44. But at least since he obivously didn't like the US, he got out. (It's time to renounce your citizenship too since it obviously sucks so bad.) We all have ridiculous taxes that we have to deal with. Our previous governor (I live in PA) campaigned on getting rid of the property tax by putting in casinos. We have the casinos, the state has their tax dollars, but no change in property taxes except up.

    As for people complaining about retirement benefits being taxed, what did you expect? They work like an IRA that you have no control over.

  • Report this Comment On April 21, 2013, at 9:18 AM, Grandpastu wrote:

    Prior to retiring, do yourself a favor and research moving to Tennessee. I did it 10 years ago and wish I had done it sooner. The people, climate and the tax rates are all conducive to a pleasant retirement. Plus, fishing at Kentucky Lake in western Tennessee is great or you can golf 11 months out of the year! Come on down! From a New Hampshire retiree!

  • Report this Comment On April 21, 2013, at 2:52 PM, passedby wrote:

    Typical coming from a tea party governor! Nebraska is not the good life he proclaims it is for retired people.

  • Report this Comment On April 21, 2013, at 6:28 PM, volosong wrote:

    Absolutely, for sure, don't even consider Wyoming. The winter is brutal. I never rains, so everything is dry and brown. You have to drive a pick-up. The most common sport is high school football and parents drive from one side of the state to the other just for a Friday evening game. Just a bunch of cowboys and rednecks. No! Don't go to Wyoming ... (I don't want it to be spoiled and the real estate prices to go out of sight before I get there when I retire in about five more years.)

  • Report this Comment On April 21, 2013, at 9:11 PM, AbuRas wrote:

    To paulc2013;

    Texas is that big cow paddy you will find if you head east from California.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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