As you approach or enter retirement, you may be thinking about taxes and how to minimize them. That's a smart thing to do at any point in your life, but when you're living on a relatively fixed income, it can be even more important.
Here, then, is a review of how various states tax various retirement incomes. Since there are different kinds of retirement income (such as Social Security benefits, retirement account distributions, etc.), the rules differ from state to state.
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These 9 states don't tax income
Let's start with income. If you live in one of the following states, you can rejoice -- because they don't have a state income tax -- and not just for retirees:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Before you start packing your bags to move to one of these states, take a breath and keep reading. Remember that every state needs to generate revenue in one way or another, so a state that doesn't tax income may still have a steep sales tax or property tax or some other significant tax rate(s). It's important to assess a state's total tax picture.
These 4 states tax some types of income but don't tax retirement income
Here's a list that might matter more if you're a retiree -- because it's a list of states that do tax income in general, but not retirement income:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
These 41 states don't tax Social Security
While many states might tax some or much of your income in retirement, a big question might be whether they'll tax your Social Security benefits. (Note that as of August, the average Social Security retirement benefit was $2,008 per month, or about $24,000 per year.)
The news is good here -- 41 states, plus the District of Columbia, don't tax Social Security:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Washington, D.C.
- Wyoming
As you plan for your retirement, you should get a rough idea of how much you can receive from Social Security. To do that, set up a my Social Security account on the Social Security Administration (SSA) website. Then you'll be able to see the SSA's records of your past earnings and estimates of your benefits depending on when you claim them.
It's also worth noting that Social Security's coffers are shrinking, and that if nothing is done, benefits may be shrinking, too, in a few years. Also worrisome is that President Trump has enacted some changes that are likely to hurt Social Security.
These 9 states do tax Social Security benefits
The 9 states below do tax Social Security benefits. But it's probably not as bad as you fear, if your state is among them. That's because many retirees in these states will pay little to nothing to the state on their Social Security benefits, because there are often income or age thresholds, with older and/or lower-income residents excluded from the tax.
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Interestingly and encouragingly, this list of states has been shrinking. As of 2016, 13 states taxed Social Security. So within a few years, perhaps this will be a shorter list.
Remember, though, that the federal government does tax some Social Security benefits. Not all, though, and many retirees will not be paying any tax to Uncle Sam on their benefits.
These 13 states don't tax any retirement income
Put all those lists together and you'll arrive at the following states that don't tax any retirement income. They'll not touch your Social Security benefits, earned income, dividends, interest, retirement account withdrawals, and pension benefits.
- Alaska
- Florida
- Illinois
- Iowa
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
The list is only for state taxation, though -- the federal government still taxes income for most of us.
Planning your retirement
As you plan for your retirement, do think about retirement taxes, but think beyond that, too. Think about how much income you'll likely need and how you'll get it. It can be smart to set up multiple income streams, perhaps from dividend-paying stocks, pensions, Social Security, annuities, and retirement account withdrawals.
