Most and Least Tax-Friendly States for Retirees

Although many states exempt certain types of income, such as Social Security benefits, from their income taxes, they’ll get retirees in other ways. Some states, like Connecticut, will offer almost no exemptions and others, like Alabama, don’t even charge any state property taxes. So where’s the best place to retire? Kiplinger’s listed the 10 most tax friendly and the 10 least tax friendly so you can make the decision.

10 Most Tax-Friendly States

Pennsylvania

Flat rate of 3.07%.

Income-tax range:

No tax on Social Security benefits or any type of public or private pensions. It doesn’t nick distributions from 401(k)s, IRAs, deferred-compensation plans or other retirement accounts.

Delaware

2.2% — 6.95%.

Income-tax range:

No sales tax, modest income-tax rates, Social Security benefits are exempt and senior taxpayers can exclude $12,500 of investment and qualified pension income from state income taxes.

South Carolina

3% — 7%

Income-tax range:

The state does not tax Social Security benefits and provides a generous retirement-income deduction when calculating state income tax. State income-tax rates are reasonable, and property taxes are very low.

Georgia

1% — 6%

Income-tax range:

Social Security income and up to $35,000 of most types of retirement income are exempt. In 2012 taxes on retirement income will be phased out.

Kentucky

2% — 6%

Income-tax range:

Social Security benefits exempted from state income taxes plus up to $41,110 per person of a wide variety of retirement income.

Alabama

2% — 5%

Income-tax range:

Most retirement income is exempt from state income taxes. Homeowners 65 and older don't pay state property taxes, but some cities and counties apply their own property levies.

Mississippi

3% — 5%

Income-tax range:

Exempts Social Security benefits from state income taxes and excludes all qualified retirement income from state income taxes. Remaining income is taxed at a maximum 5%. Mississippi is home to some of the cheapest property taxes in the nation.

Louisiana

2% — 6%

Income-tax range:

Social Security, military, civil-service, and state- and local-government pensions are exempt from state income taxes. Property taxes are among the lowest in the nation, and assessments are based on 10% of the fair market value.

Oklahoma

0.5% — 5.5%

Income-tax range:

No tax on Social Security benefits or Civil Service Retirement system retirement benefits for those who receive a federal pension in lieu of Social Security.

Real estate is assessed at an amount between 11% and 13.5% of its fair market value.

Wyoming

None

Income-tax range:

The state sales tax is low. For most property, only 9.5% of market value is subject to tax. Wyoming residents shoulder one of the lowest tax burdens in the U.S., according to the Tax Foundation.

10 Least Tax-

Friendly

States

New Jersey

1.4% — 8.97%

Income-tax range:

It’s no surprise that New Jersey appears here. According to the Tax Foundation, New Jersey has been one the top 5 states with the highest tax burden since 1977 and for the last three years running New Jersey has topped the list.

However, it does not tax Social Security benefits and military pensions. Seniors may also qualify for an exclusion of part of their retirement income from state income taxes.

Connecticut

3% — 6.7%

Income-tax range:

Its real estate taxes are among the highest in the nation. It allows a 50% exclusion for military pensions, but no exemptions or tax credits for other types of pensions or other retirement income. And it taxes a portion of Social Security benefits for taxpayers above certain income thresholds.

Vermont

3.55% — 8.95%

Income-tax range:

It taxes most retirement income, including Social Security. Real estate taxes have two components: school property tax and municipal property tax.

Maine

2% — 8.5%

Income-tax range:

Social Security benefits exempt from state income taxes.

Up to $6,000 per person of eligible pension income can be deducted. Residents with taxable income in excess of $20,150 pay a steep 8.5% rate.

Wisconsin

4.6% - 7.75%

Income-tax range:

Social Security benefits are exempt from its state income taxes, but there are taxes on rest of your pension and annuity income.

Wisconsin's sales tax is reasonable.

Minnesota

5.35% — 7.85%

Income-tax range:

Social Security income is taxed to the same extent it is on your federal return. Pensions are taxable. Income-tax rates and the sales tax are high. However, Minnesota does offer some retirees a break on property taxes.

Iowa

0.36% — 8.98%

Income-tax range:

The state taxes a portion of Social Security benefits but is in the process of phasing out the tax. Real estate is assessed at 100% of market value and most property is taxed by more than one taxing authority.

Nebraska

2.56% — 6.84%

Income-tax range:

Social Security benefits will be taxed to the same extent that they are on your federal return. No special breaks for military retirees, either. Real estate is assessed at 100% of fair market value. Seniors qualify for a homestead exemption on property taxes.

Oregon

5% — 11%

Income-tax range:

Oregon shares with Hawaii the distinction of imposing the highest personal income-tax rate in the nation.

Although Oregon does not tax Social Security benefits, that's the extent of its income-tax breaks for retirees. Most other retirement income is taxed at your top income-tax rate. The one bright spot in Oregon's tax picture is its lack of a sales tax. You can buy anything in the state and never pay a penny in sales taxes.

California

1.25% — 9.55%.

Income-tax range:

Although Social Security benefits are exempt, all other forms of retirement income are fully taxed. California residents pay some of the highest income taxes in the U.S. with a high statewide sales tax. Real estate is assessed at 100% of cash value.