Posted on 01/01/2023 8:45:43 PM PST by SeekAndFind
Most people have a dream home in mind for retirement. It might be a quaint beach house, a log cabin deep in the woods, or a penthouse high in the sky. But no matter where you plan to live during your golden years, make sure you check out the local tax situation in your dream destination before packing your bags and relocating. If you don't, and you end up in one of the least tax-friendly states for retirees, you might end up with a hefty state and local tax bill.
State and local taxes can vary greatly from one place to another. The difference can easily exceed $10,000 or more per year for some people, which is enough to break the bank for a lot of seniors if you wind up in one of the worst states to retire in for taxes. To avoid this kind of bombshell, do your homework before settling on a new location. You can start with our State-by-State Guide to Taxes on Retirees (opens in new tab). This tool maps out the tax landscape for each state and the District of Columbia.
We also identified the 10 least tax-friendly states for retirees, which are listed below (we saved the worst state for last). Our results are based on the estimated state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, 401(k) plans, traditional and Roth IRAs, private pensions, interest, dividends, and capital gains. One couple had $50,000 in total income and a $250,000 home, while the other had $100,000 of income and a $350,000 home. Take a look to see if your state — or the state you've been dreaming about for retirement — made our list of the "least tax-friendly" states for retirees (we hope it didn't).
You might be surprised to see the Lone Star State on the list of least tax-friendly states for retirees. After all, isn't Texas one of the handful of states with no income tax? Well, yes, it's true that there are no income taxes in Texas...which means no taxes on Social Security benefits, pensions, 401(k)s, IRAs, or any other type of retirement income. But a lot of states don't tax these types of retirement income anyway (or at least partially exempt them), so states without any income tax don't necessarily have an advantage over other states when it comes to taxes on seniors.
Texas' main problem is with its property taxes. The state's median property tax rate is the seventh-highest in the country. For our hypothetical retired couples, that means an estimated annual property tax bill of $3,998 for the couple with the $250,000 home and $5,597 for the couple with the $350,000 home. On the bright side, seniors may be able to get a $10,000 property tax exemption, have their tax bill "frozen," or delay payment of taxes.
Sales taxes are on the high end in Texas, too. The state imposes a 6.25% tax, but local governments can tack on up to 2% more. When combined, the average state and local sales tax rate in Texas is 8.2%, which is the 14th-highest combined rate in the country.
For more information on these and other Texas state and local taxes, see the Texas State Tax Guide (opens in new tab).
The Badger State suffers from weak income tax breaks for retirement income and high property taxes. While Social Security benefits aren't subject to Wisconsin's income taxes, income from pensions and annuities, along with distributions from IRAs and 401(k) plans, are generally taxable. Seniors can subtract up to $5,000 of retirement income (including distributions from IRAs) from Wisconsin taxable income if their federal adjusted gross income is less than $15,000 ($30,000 for a married couple filing jointly). But that exclusion is comparatively small and is only available to retirees with a relatively low income.
Property taxes are the eighth-highest in the U.S. For our hypothetical couple with a $250,000 home in Wisconsin, estimated property taxes would be about $3,775 per year. The make-believe couple with a $350,000 home would have to cough up about $5,285 each year for taxes. Plus, there are only limited property tax breaks for retirees. For instance, unlike younger taxpayers, residents age 62 or older don't need earned income to claim an income tax credit for property taxes paid. Property tax deferral loans are also available for seniors with incomes under $20,000.
There are some bright spots for retirees, though. For example, sales taxes are actually low in Wisconsin. It has the ninth-lowest combined average state and local tax rate in the nation. There are no estate or inheritance taxes, either.
For more information on these and other Wisconsin state and local taxes, see the Wisconsin State Tax Guide (opens in new tab).
Nebraska is one of the least tax-friendly states in the nation for retirees primarily because of steep income and property taxes (although the income tax burden is on it's way down). With regard to the state's income tax system, the Cornhusker State taxes some Social Security benefits, although taxpayers can chose to deduct 40% of Social Security benefits included in federal AGI for the 2022 tax year (the percentage will gradually rise to 100% by 2025). Most other retirement income is also taxed, including IRA withdrawals, 401(k) funds, and public and private pensions (although military pensions are fully exempt). Plus, the top income tax rate kicks in pretty quickly: For 2021, it applies to taxable income above $32,210 for single filers and $64,430 for married couples filing jointly (2022 thresholds are not yet available). However, beginning in 2023, the top rate is gradually reduced according to the following schedule: 6.64% in 2023, 6.44% in 2024, 6.24% in 2025, 6% in 2026, and 5.84% in 2027 and thereafter. That will help many retirees.
For 2022, Nebraska's inheritance tax ranges from 1% to 18% (from 1% to 15% after 2022). The tax on heirs who are immediate relatives is only 1% and does not apply to property that is worth less than $40,000 ($100,000 after 2022). For remote relatives, the tax rate is 13% and the exemption amount is $15,000 (11% and $40,000, respectively, after 2022). For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more (15% and $25,000, respectively, after 2022). However, regardless of the heir's relationship to the decedent, the state's inheritance tax doesn't apply to heirs 21 years of age or younger.
The median property tax rate in Nebraska is pretty high. For a $250,000 home, the statewide average tax in the state is $3,773 per year. It's $5,282 for a $350,000 residence. Those totals are the ninth-highest property tax amounts in country for homes at those price points. People over age 65 with income less than a certain amount may qualify for a homestead exemption that blocks all or a portion of their property's value from taxation.
The state sales tax rate is 5.5%, but local jurisdictions can add an additional 2.5% to the state rate. The average combined state and local sales tax rate is 6.94%, which is in the middle of the pack when compared to other states.
For more information on these and other Nebraska state and local taxes, see the Nebraska State Tax Guide (opens in new tab).
Like a few other states, Iowa's spot on our list of the least tax-friendly states for retirees is primarily based on high property taxes. The statewide median property tax rate in Iowa is the 10th-highest in the U.S. Our imaginary couple with a $250,000 home in the state would fork out about $3,753 per year in real property taxes. The couple with a $350,000 home could expect to pay about $5,254 annually. To help ease the financial pain, a modest property tax credit is available to lower-income seniors.
On the income tax front, Social Security benefits are tax-free. Currently, there's also a $6,000 exclusion ($12,000 for joint filers) for most types of federally-taxed retirement income for people 55 years of age or older. However, when compared to some of the tax breaks for retirement income available in other states, Iowa's current exclusion doesn't look all that generous. As a result, income taxes for retirees in the state can be a little on the high end, especially for wealthier residents. But this will change starting in 2023, when (1) the state rates begin to be lowered and ultimately end with a 3.9% flat rate starting in 2026, and (2) 100% of retirement income is exempt for taxpayers who are at least 55 years old.
Sales taxes in Iowa are middle-of-the-road. The state rate is 6%, and localities can add as much as 1%. The average combined state and local rate is 6.94%. That puts Iowa in the middle of the pack when it comes to overall sales tax rates.
The Iowa inheritance tax is another thing retirees need to worry about – at least for the time being. In 2021, the Hawkeye State started phasing out it's inheritance tax over a five-year period by reducing the rate of tax by 20% each year (the base rates range from 5% to 15%). Therefore, for 2022, Iowa's inheritance tax ranges from 3% to 9%, depending on the amount of the inheritance and the relationship of the recipient to the decedent. The tax will be completely repealed on January 1, 2025.
For more information on these and other Iowa state and local taxes, see the Iowa State Tax Guide (opens in new tab).
Unfortunately, the Empire State's heavy tax burden for middle-class families carries over into retirement — especially when it comes to property taxes. Based on New York's statewide median tax rate, our first hypothetical retired couple would pay about $4,050 each year in property taxes on their $250,000 home in New York. For our second couple, the annual estimated tax bill is $5,670 for their $350,000 home. Those figures are the sixth-highest amounts in the country for those home values. There are some property tax breaks for seniors, though. Local governments and public-school districts can reduce the assessed value of their home by 50%. Under another program, part of a senior's home value can be exempt from school property taxes.
New York has high sales taxes, too. There's a 4% state tax, and localities can add as much as 4.875% in additional taxes on purchases in the state. At 8.52%, New York's average combined (state and local) sales tax rate is the 10th-highest in the nation.
When it comes to income taxes, New York's tax bite is less severe for ordinary retirees when compared to other states. Social Security benefits, federal and New York government pensions, and military retirement pay are exempt. However, anything over $20,000 from a private retirement plan (including pensions, IRAs and 401(k) plans) or an out-of-state government plan is taxed. Also, for ultra-wealthy retirees, New York income tax rate is steep — 10.9%. Fortunately, there's some relief in site: Beginning in 2028, the top rate is scheduled to drop down to 8.82% (where it was before 2021).
New York also has an estate tax — with an unusual "cliff tax" kicker. Generally, for deaths in 2022, the tax is only imposed on that portion of an estate over the $6.11 million exemption ($6.58 million in 2023). However, if the value of the estate is more than 105% of the exemption amount, the exemption won't be available and the entire estate will be subject to New York estate tax. Ouch!
For more information on these and other New York state and local taxes, see the New York State Tax Guide (opens in new tab).
The Constitution State is a tax nightmare for many retirees...but at least things are improving on the income tax front. For residents with federal adjusted gross income over $75,000 ($100,000 for joint filers), 25% of Social Security benefits taxed at the federal level are taxed by Connecticut. (Social Security payments are exempt for taxpayers below those income levels.) As for improvement, beginning with the 2022 tax year, income from a pension or annuity is fully exempt for joint filers with less than $100,000 of federal adjusted gross income and other taxpayers with less than $75,000 of federal AGI (only 42% was exempt for the 2021 tax year). Then, starting in 2023, 25% of any distribution from a traditional IRA is exempt for joint filers with less than $100,000 of federal adjusted gross income and other taxpayers with less than $75,000 of federal AGI. The exemption percentage is increased to 50% in 2024, 75% in 2025, and 100% in 2026 and thereafter. Military pensions are also excluded from state taxes.
Connecticut has the third-highest property taxes in the U.S. For our two make-believe retired couples, the statewide estimated property tax for a $250,000 home in Connecticut is $4,893 per year, and the estimated annual tax for a $350,000 home in the state is $6,850. The state does offers property tax credits to homeowners who are at least 65 years old and meet income restrictions. For 2022 credits, the income ceilings are $46,400 for married couples (with a maximum benefit of $1,250) and $38,100 for singles (with a maximum benefit of $1,000).
For 2022, Connecticut imposes an estate tax on estates valued at $9.1 million or more at either an 11.6% or 12% rate (the Connecticut exemption amount will equal the federal estate tax exemption amount beginning in 2023). Connecticut is also the only state with a gift tax, which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents. Only the amount given since 2005 and over $9.1 million is taxed. Gift tax rates are also 11.6% or 12%.
There are no local sales taxes in Connecticut, so you'll pay only the statewide sales tax rate of 6.35% on your purchases (slightly below average). Clothing, footwear and accessories priced at more than $1,000; jewelry worth more than $5,000; and most motor vehicles costing $50,000 or more are taxed at 7.75%.
For more information on these and other Connecticut state and local taxes, see the Connecticut State Tax Guide (opens in new tab).
The Green Mountain State offers cold comfort on the tax front to retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont also taxes all or part of Social Security benefits for single residents with federal adjusted gross income over $50,000 (over $65,000 for married couples filing a joint return). Starting with the 2022 tax year, there is some income tax relief available for retirees. The first $10,000 of income from the federal Civil Service Retirement System, a military pension, and certain other government retirement systems is not taxed for joint filers with a federal adjusted gross income of $65,000 or less and other taxpayers with a federal AGI of $50,000 or less. Taxpayers who exceed the income limits may qualify for a reduced exemption. But the exclusion for government (including military) pension income cannot be taken if an exclusion for Social Security benefits is claimed.
Vermonters also pay a lot in property taxes. If our first made-up couple owned a $250,000 home in Vermont, they'd pay about $4,325 in property taxes each year. Our second couple, with a $350,000 home, would pay around $6,055 annually. These property tax amounts are the fifth-highest in the U.S. for those home values. Homeowners age 65 and older may qualify for a tax credit worth up to $8,000 if their household income does not exceed a certain level.
Vermont also taxes estates that exceed $5 million in value. The tax is imposed at a flat 16% rate.
Sales taxes aren't too bad in Vermont, though. Local jurisdictions can add 1% to the state's 6% sales tax, which results in an average combined state and local sales tax rate of 6.24%. That's below the national average.
For more information on these and other Vermont state and local taxes, see the Vermont State Tax Guide (opens in new tab).
While there's no place like home, I wouldn't be surprised to hear that Dorothy (and ToTo, too) fled Kansas when she retired to avoid the state's high taxes. Looking at the state's income tax system, distributions from private retirement plans (including IRAs and 401(k) plans) and out-of-state public pensions are fully taxed. Kansas also taxes Social Security benefits received by residents with a federal adjusted gross income of $75,000 or more. Military, federal government and in-state public pensions are exempt from state income taxes, though.
Shopping in Kansas can be expensive, too. The Sunflower State's average combined state and local sales tax rate is the ninth-highest in the U.S. at 8.71%. Groceries and clothing are subject to state and local sales taxes in Kansas, too. However, the state sales tax on groceries is reduced to 4% in 2023, 2% in 2024, and 0% in 2025 and thereafter (local taxes on groceries will still apply).
Property taxes are above the national average as well. The statewide average property tax bill for our first hypothetical retired couple with a $250,000 home in Kansas comes to about $3,325. The bill for our second imaginary couple, with a $350,000 home, is estimated to be $4,655. Those amounts are the 13th-highest in the U.S. Homeowners who satisfy certain age and income requirements may qualify for a property tax credit or refund, though.
The good news is that Kansas doesn't impose estate or inheritance taxes.
For more information on these and other Kansas state and local taxes, see the Kansas State Tax Guide (opens in new tab).
There's a bit of good tax news for retirees in Illinois: Social Security benefits and income from most retirement plans are exempt. Plus, the state's 4.95% flat income tax rate won't take too much of a bite out of your retirement income.
Now for the bad news: Property taxes hit retirees hard in Illinois. The statewide median property tax rate in Illinois is the second-highest in the nation — a staggering $5,183 per year on a $250,000 home and a whopping $7,256 on a $350,000 home. Fortunately, there's some relief for qualifying seniors in the form of a homestead exemption of up to $5,000 ($8,000 in Cook County and, starting in 2023, bordering counties), the ability to "freeze" a home's assessed value, and a tax deferral program.
Sales tax rates are high in Illinois, too. The state has the eighth-highest average combined state and local sales tax rate at 8.73%. In some locations, the rate can be as high as 11%! Groceries (1% state rate; additional local taxes may apply) and clothing are taxable, too. (Note: The state tax on groceries is suspended from July 1, 2022, to June 30, 2023.)
Illinois also has an estate tax that applies to estates worth $4 million or more. That can be bad news for your heirs.
For more information on these and other Illinois state and local taxes, see the Illinois State Tax Guide (opens in new tab).
Sorry, New Jersey, but you're the least tax-friendly state in the country for retirees. And, once again, it's the property taxes that are crushing retirees. The Garden State has the highest median property tax rate in the country. If our first make-believe couple bought a $250,000 home in the state, they would pay an eye-popping $5,643 in property taxes each year based on our estimates. Our second couple would pay a sky-high $7,900 on their $350,000 New Jersey home. The state does offer some property tax relief for seniors, though. Homeowners age 65 or older can claim either a tax deduction for up to $15,000 or a $50 refundable credit on their New Jersey income tax return for property taxes paid for a primary resident in New Jersey. There's also a program (the "senior freeze") that reimburses eligible seniors for property tax increases. And a $250 property tax deduction is available for senior citizens with an annual household income of $10,000 or less.
Income taxes are comparatively low for retirees in New Jersey, thanks in large part to a generous exemption for retirement income. For example, married seniors filing a joint return can exclude up to $100,000 of income from a pension, annuity, IRA, or other retirement plan if their New Jersey income is $100,000 or less. Single taxpayers and married taxpayers filing a separate return can exclude up to $75,000 and $50,000, respectively, if their income doesn't exceed $100,000. We should also point out that Social Security benefits are not taxed in New Jersey, either.
Sales taxes are reasonable in New Jersey, too. The state sales tax rate is 6.625%, but because some areas charge only half the state rate on certain sales, New Jersey's average state and local combined sales tax rate is only 6.6%, which is a little below average.
Although New Jersey recently eliminated its estate tax, the state still imposes an inheritance tax. The tax rates range from 11% to 16% on inherited property with a value of $500 or more. The amount of tax due is based on who specifically receives the property and how much the property is worth.
For more information on these and other New Jersey state and local taxes, see the New Jersey State Tax Guide (opens in new tab).
Read later.
Yet, DC is #7…….good luck finding something to live in for $300,000 or less in DC.
Texas is on the list but California is not? Yeah, that’s the ticket.
Delawareans will soon start to notice the boots-on-the-ground efforts for property tax reassessment
If it really was retiree friendly, it won't be for long.
We’re NYS lifers.
Decades ago we bought a very small, very inexpensive home.
We used to get a lot of ribbing about that.
Now we know folks who can’t sleep at night wondering how they’re going to pay the high four to low five fig annual property tax bill on their larger, nicer homes.
We never have worried about that.
And trust me when I tell you that the thought of all the property tax income we have denied local and state bureaucrats over the decades more than makes up for the lack of space and inconvenience.
Or not in the Austin, Houston or Dallas areas.
This article also misses the fact that the general cost-of-living is less in Texas than it is elsewhere. Of course, certain items like cars won’t be much less expensive, but when you combine lower prices for land, and no state income tax, the overhead burden for many businesses is much lower than in states that don’t have these factors.
“This article also misses the fact that the general cost-of-living is less in Texas than it is elsewhere.”
Absolutely - just registering cars in Texas is very cheap, and insurance is likely on the low side also. Also, electricity and gas are VERY CHEAP, at least compared to the Northeast.
That’s why I think articles like this are intentionally slanted against red states.
What is the TX government doing with all that tax money? Are they really spending it better than the people who generated that money with their own labor? Or is it going to politicians, unions, waste, grade school drag shows etc, like everywhere else?
Amen, owning a nice paid for (or not) home in Texas is just like renting! In Texas you pay high school taxes, city taxes, and road taxes all in one bill adding up to about 2.5 %. To make things worse, they can raise them $1000 or more each year! And, you can’t petition to vote them down, because it is not legal in Texas to put it on the ballot. That is 90% of the reason that Texas ran me off…
“What is the TX government doing with all that tax money? Are they really spending it better than the people who generated that money with their own labor?”
Obvious answers to the second. For the first, I believe it’s mostly Medicaid (for those who choose not to work) and Education (for the idiots who still think public schools are ‘wonderful’, and those that are too lazy or too poor to take matters into their own hands), and maybe Food Stamps (not sure who funds that).
While it would be nice to have a state more in line with Asian countries that say “No work, then no food”...most Americans, including most ‘conservatives’ simply wouldn’t tolerate it.
Homesteaded or not, owning a nice paid for (or not) home in Texas is just like renting! In Texas you pay high school taxes, city taxes, and road taxes all in one bill adding up to about 2.5 %. To make things worse, they can raise them $1000 or more each year! And, you can’t petition to vote them down, because it is not legal in Texas to put it on the ballot. That is 90% of the reason that Texas ran me off…
Good post—we have done the same in CT.
The old real estate rule was to buy the least expensive house in the best neighborhood/area possible—that is what we did.
Sleeping well at night not worrying about finances is priceless.
We looked very hard at retiring to different southern states but could not find a better situation than we have now.
We looked especially carefully at a variety of Texas locations—concluded that we could not count on the future control of illegal immigration to keep their taxes (and crime) under control. Future events may prove us wrong—but we had to make a call and that is the one we made.
We had planned on bugging out of NYS.
But the last two years have shown that no state in the union, and that includes FL, is willing to secure their elections.
Until that changes, every red state is one stolen election away from disaster.
We’re not risking any more of our money until that changes.
Very astute!!
South Dakota & Wyoming should be in the top 5, I live on an plot of land just over an acre with a nice 4 br home. No state taxes and my property tax is $300 a year and certain veterans pay NO property tax. Life here is Good.
In a way that is not bad. Left to tend to only look at the surface layers of any issue, and if they read an article like this, they won’t want to move here. If they did further analysis, they might want to. So, good, let’s keep them away.
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