The Most Tax-Friendly States for Retirees
With so many factors to consider, choosing where to live in retirement is never an easy decision.
Top priorities for those contemplating retired life? These often include the desire to live in close proximity to family and friends, relocate to a warmer place, reduce housing costs, and have access to quality healthcare—mixing and matching these as needed.
While the aforementioned criteria are admirable, one oft-overlooked consideration is taxes. As the total state and local tax burden differs from state to state (sometimes by thousands of dollars a year), gaining a high-level understanding of your potential tax bill—especially if your retirement funds are limited—is critical and should factor into your decision-making process.
States that tax Social Security income
Social Security retirement benefits are sometimes subject to federal income tax for many Americans, depending on total income. Specifically, if one's overall income—combining Social Security and other sources—exceeds $25,000 for single filers ($32,000 for couples filing jointly), up to 50% of SS benefits can be taxed. If a single filer earns at least $34,000 ($44,000 for couples filing jointly), meanwhile, up to 85% of Social Security benefits are subject to federal tax.
Those who plan to retire in Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, or West Virginia in 2025 may also face state tax on Social Security benefits (though West Virginia plans to phase this out by 2026). Consequently, you might want to consider avoiding these states based solely on tax implications if they adversely impact your Social Security benefits.
The most tax-friendly states for retirees based on retirement income
If you have a 401(k), IRA, or pension, it's important to know how your retirement income will be taxed.
Unfortunately, all U.S. states except nine—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—impose such taxes. This means if you're retired in one of these tax-friendly states and take a distribution from your IRA or 401(k), receive Social Security benefits or a pension, or generate investment income, you won't owe any state taxes on the same (though federal taxes still apply).
Many retirees may thus want to consider living in one of these areas to minimize their tax burden. The same nine states also don’t tax any other type of income—an essential consideration for those looking to work during retirement—nor levy estate or inheritance taxes (with the exception of Washington), enabling you to leave a larger inheritance to heirs.
We should also mention four additional retirement-friendly states: Illinois, Iowa, Mississippi, and Pennsylvania.
Though Social Security benefits, pensions, IRA, and 401(k) distributions are tax-exempt in Illinois, a flat 4.95% tax applies to earnings from other sources (e.g., investment income). Most retirement income is tax-exempt in Iowa for retirees aged 55+, meanwhile, but other types of income (e.g., wages and investments) are in fact taxed—with the state moving to a flat 3.9% rate in 2026. Social Security benefits, 401(k) and IRA distributions, and pensions are generally exempt from Mississippi’s 4.4% flat tax (dropping to 4% by 2026), though residents will still pay taxes on any other income exceeding $10,000. While Pennsylvania also doesn’t tax distributions from Social Security benefits, 401(k) and IRA distributions, and pensions, a flat rate of 3.07% does apply to other types of income.
Finally, New York is also generally considered a tax-friendly state as all Social Security retirement benefits are exempt from taxation, a $20,000 exclusion applies to retirement accounts and private pensions per spouse, and federal/state pensions and military retirement pay are tax-exempt.
States that don’t have inheritance or estate tax
The terms “inheritance” and “estate” tax are often used interchangeably but in fact reflect different types of taxes. The biggest difference between the two? It’s who is responsible for paying them.
While we'll avoid discussing the nitty-gritty details here, know these taxes can play a significant role for retirees wishing to maximize the value of assets left to heirs.
According to Tax Foundation data, 17 states and the District of Columbia currently levy estate and/or inheritance taxes (Maryland charges both). Here’s a quick overview of each…
Connecticut charges an estate tax with an exemption of up to $13.99 million (meaning anything below this isn't subject to tax) at a flat rate of 12% and with tax liability capped at $15 million. It's the only state to charge a gift tax on assets residents give away while still alive (the same rates and thresholds apply).
Hawaii imposes a progressive tax starting at 10% and rising to 20% on estates worth at least $5.49 million. The state has no inheritance tax.
Illinois imposes only an estate tax with rates based on the value of the estate, capped at 16%, and with an exemption of $4 million.
Kentucky doesn't charge an estate tax but currently levies an inheritance tax based on the inheritance amount and relationship to the decedent (up to 16%).
Maine estate tax rates vary between 8 to 12%, with an exemption of $6.8 million and no inheritance tax.
Maryland charges both an inheritance and estate tax (as mentioned earlier) with a tax exemption of $5 million (plus any exclusion amount for the predeceased spouse), topping out at 16%. The inheritance tax is a flat 10% rate, sometimes waived based on one's relationship to the deceased (e.g., if the inheritor is the deceased’s child or direct descendent, the spouse of a child or direct descendent, a spouse, parent, grandparent, sibling, stepchild, or stepparent).
Massachusetts has no inheritance tax, with the state’s progressive estate tax kicking in for those valued at over $2 million and topping out at 16%.
Minnesota has no inheritance tax and an estate tax exemption of $3 million, with rates ranging from 13% to 16%.
Nebraska doesn’t charge estate tax but does have an inheritance tax as high as 15%, based on the amount of the inheritance and relationship to the decedent.
New Jersey levies an inheritance tax of up to 16% based on the amount received and the relationship between the decedent and beneficiary or transferee. Surviving spouses, parents, children, grandchildren, etc., for example, are exempt (considered "Class A" beneficiaries) while nieces, nephews, aunts, uncles, friends, and other non-relatives are subject to inheritance tax.
New York doesn’t charge inheritance tax but does levy estate taxes for values exceeding $7.16 million, with rates ranging from 3.06% to 16%. What’s more, if the value of one’s estate exceeds 5% of the current exemption at the time of his/her death, the entire estate is subject to tax (referred to as a “cliff tax”).
Pennsylvania only charges an inheritance tax—up to 15%—based on the relationship to the decedent, but this doesn’t apply to spouses, parents (if the decedent is younger than 22), or children under the age of 21. In addition, a discount of 5% applies on the tax paid or due—whichever is less—when the payment is made within three months of the decedent’s death.
Oregon estate taxes start at 10% and rise to 16%, applied to estates above $1 million. The state has no inheritance tax.
Rhode Island, which also has no inheritance tax, charges an estate tax that currently tops out at 16% with an exemption of up to $1,802,431.
Vermont doesn’t charge an inheritance tax but does have a flat estate tax of 16% with an exemption of up to $5 million. Residents are allowed to make deductions to reduce estate value when they file based on marital status, debts and administration expenses, and charitable deductions.
Washington has no inheritance tax, but the state imposes an estate tax (between 10% and 20%) on those exceeding $2.193 million. An additional deduction of up to $2.5 million is available for family-owned businesses valued at $6 million or less.
Finally, Washington D.C. levies an estate tax applicable to any estate worth more than $4,873,200 with tax rates topping out at 16%.
States with the lowest property taxes
As housing costs (including mortgage, rent, property taxes, insurance, maintenance, and repairs) are the largest expense for retirees, we’d be remiss to omit this specific topic. Indeed, the average retiree household dedicates an average of $21,445 annually ($1,787 monthly) to this category: representing over 36% of annual expenditures. It's therefore crucial to consider and plan for these types of expenses during retirement, especially if you'll have a limited income.
In many states, property taxes are a major component of housing expenses (apart from mortgage payments). New Jersey has the highest property tax rates in the country, with WalletHub reporting an effective real estate tax rate of 2.33% that results in annual property taxes ringing in at approximately $9,345 for a NJ home valued at $401,400 (for example). Following behind with respect to annual taxes based on median home values are Connecticut ($6,484), New Hampshire ($6,372), New York ($6,303), and Massachusetts ($5,584).
States with the least expensive property taxes, meanwhile, include Alabama ($701), West Virginia ($809), Arkansas ($959), Louisiana ($1,087) and South Carolina ($1,138). Hawaii, Alabama, Colorado, Nevada, and South Carolina have the lowest effective real-estate tax rates.
States with the lowest sales tax
Every dollar counts for those of you who are (or will be) on a fixed income, which is precisely why you may also want to review sales tax rates as you’ll likely spend a significant portion of your income on taxable items. The five states that charge the lowest combined state and local sales tax rates are Oregon, New Hampshire, Montana, and Delaware (all 0%) and Alaska (2%).
The five states that charge the highest combined (state and local) sales tax rates, meanwhile, are Louisiana (9.6%), Tennessee (9.6%), Arkansas (9.5%), Washington (9.5%), and Alabama (9.3%) (per the most recent Tax Foundation data).
Where people are retiring
Not a numbers person? No worries! You can simply research the places where most retirees settle down—and why! To give you a jump start, we crunched the numbers based on five years of SmartAsset data; to the surprise of absolutely no one, Florida is (and remains) the most popular retirement destination in the United States. It’s not even close.
The data, meanwhile, reflects a total of 843,965 people aged 60+ represented in their “top 10 retirement destinations” study (with locations varying slightly each year). About 44% of retirees within this group ended up in the state of Florida, an ongoing trend as mentioned. To illustrate the disparity between states, Arizona—the second-most popular retirement destination—saw a positive net migration of 146,574 (17.4%) retirees across the five years of data we reviewed.
In sum: tax-friendly states for retirees
While decisions about where to live in retirement involve so much more than finances, they of course play a significant role—which is one reason why knowing potential tax implications can help save you a lot of money in the process.
Want to get the most out of your retirement? Schedule a FREE discovery call with one of our CFP® professionals to get your questions answered.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
Sources for this article include Tax Foundation, Kiplinger, SmartAsset, and WalletHub.
