RETIREMENT MOVING? Don't Overlook the State Tax Bite
Kiplinger's Personal Finance|March 2022
State taxes could take a big slice of your retirement budget.
ROCKY MENGLE

As you approach retirement (or if you’re already there), you may be thinking about moving to a different state to spend your golden years. If that’s the case, you’ll want to consider climate, proximity to family and friends, access to quality health care, and a host of other important factors. And make sure you’ve added state taxes to the list of considerations.

Depending on your situation, the total state and local tax burden in one state could be thousands of dollars more each year than in another. Some states exclude all or a significant portion of income from retirement savings, while others tax nearly all of your retirement income, including Social Security. If you plan to own a home in your new state, property taxes could also put a big dent in your budget, and in many states, those taxes have been rising (see “Ahead,” on page 9). To help seniors avoid a state tax bombshell, Kiplinger has created a state-by-state guide to taxes on retirees (we also included Washington, D.C.). Our results are based on the estimated 2020 state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, traditional and Roth IRAs, private pensions, 401(k) plans, 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 (see the box on page 61 for more about our methodology).

All but one of the states on our most-tax-friendly list completely exempt Social Security benefits from state income taxes. Most also allow an exemption for at least a portion of our hypothetical couples’ other retirement income, such as private pensions or IRA withdrawals.

For details on taxes in every state, including estate and inheritance taxes, go to kiplinger.com/kpf/retireetaxmap.

MOST TAX-FRIENDLY

1. DELAWARE

State Income Tax: 2.2% (on taxable income from $2,001 to $5,000) to 6.6% (on taxable income over $60,000)

Average Combined State and Local Sales Tax Rate: 0%

Median Property Tax Rate: $562 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: None

With no sales tax, low property taxes and no death taxes, it’s easy to see why Delaware is a tax haven for retirees. For starters, you’ll have more disposable income if you live in the First State, because you’ll pay zero state or local sales tax on in-state purchases. (Delaware is one of only a handful of states with no sales tax.)

The estimated annual property tax bill in Delaware for our first hypothetical retired couple is just $1,405 on their $250,000 home. It’s just $1,967 for our second couple’s $350,000 home. Those property tax totals are the seventh-lowest amounts in the nation for homes at those prices. Plus, some Delaware seniors qualify for a school property tax credit of up to $400 (you might have to live in the state for 10 years to get it, though). Because Delaware has no estate or inheritance taxes, you can pass along more of your wealth to the grandkids, too (or to other family, friends or charities).

The only downside is middle-ofthe-road income taxes—and they really aren’t that bad. The rates are comparatively reasonable, and residents age 60 and older can exclude up to $12,500 of pension and other retirement income (including dividends and interest, capital gains, and IRA and 401(k) distributions). Social Security benefits are also exempt. But, in the end, income taxes don’t add enough to a retiree’s overall tax burden to prevent the state from winning the top spot on our list.

2. HAWAII

State Income Tax: 1.4% (on taxable income up to $2,400 for single filers; up to $4,800 for joint filers) to 11% (on taxable income over $200,000 for single filers; over $400,000 for joint filers)

Average Combined State and Local Sales Tax Rate: 4.44%

Median Property Tax Rate: $280 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: Estate tax

If your dream is to retire to a tropical island paradise, don’t let taxes get in the way. Hawaii has one of the lowest average state and local tax burdens in the U.S. Higher-income seniors may get caught in the Aloha State’s lofty income tax rates (the top rate is a whopping 11%), but most retirees won’t pay nearly that much. (Hawaii actually has 11 income tax rates below 11%.) Social Security benefits are completely tax-free.

Although housing prices are high in Hawaii, property tax rates are really low. In fact, the statewide median property tax rate is the lowest in the country by a pretty good margin. If our hypothetical retired couple moved to Hawaii, their estimated annual property tax bills would be only $980 on a $350,000 home (assuming they could find one at that price). Depending on where in Hawaii they live, seniors could also qualify for some additional property tax relief.

The average combined state and local rate is 4.44%, which is the seventh-lowest rate in the nation. However, most things are taxable in Hawaii— including groceries and clothing—so residents typically end up paying more than the low rate suggests.

Hawaii also imposes an estate tax on estates worth $5.49 million or more. Tax rates range from 10% to 20%.

3. WYOMING

State Income Tax: None

Average Combined State and Local Sales Tax Rate: 5.39%

Median Property Tax Rate: $575 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: None

The Equality State’s favorable tax climate for seniors starts with zero income, estate or inheritance taxes. Sales taxes are low in Wyoming, too. The average combined state and local sales tax rate is 5.39%, which is the eighth-lowest combined sales tax rate in the country.

You won’t pay high property taxes to own a home on the range, either. For a $250,000 home in Wyoming, the statewide average annual property tax bill comes to just $1,438; it’s $2,013 for a $350,000 home. Those amounts are tied for the 10th-lowest tax totals in the nation for each price point. Plus, eligible seniors can delay payment of up to 50% of their property taxes if money gets tight in retirement.

4. DISTRICT OF COLUMBIA

State Income Tax: 4% (on taxable income up to $10,000) to 8.95% (on taxable income over $1 million)

Average Combined State and Local Sales Tax Rate: 6%

Median Property Tax Rate: $564 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: Estate tax

Although the general cost of living in Washington, D.C., is high, the average tax burden for retirees isn’t. The city doesn’t tax Social Security payments, but it does tax most other common forms of retirement income, such as pensions and withdrawals from 401(k)s and IRAs. Notably, qualifying for the city’s income tax credit for property taxes paid can make a huge difference in the amount of tax you owe. The refundable credit is worth up to $1,225 for the 2021 tax year (refundable means that if the credit is worth more than the tax you owe, the city will send you a check for the difference). For 2021, residents age 70 and older are eligible for the credit if their federal adjusted gross income is $76,700 or less; the threshold is $56,200 or less for younger residents.

The District’s median property tax rate is the eighth-lowest in the nation when measured against comparable data from all 50 states. For our hypothetical retired couples, their estimated annual property tax bills would be $1,410 (on a $250,000 home) and $1,974 (on a $350,000 home). Plus, homeowners 65 and older may qualify for a 50% property tax reduction or deferral of property tax payments.

Shoppers don’t get hit too hard by sales taxes in the nation’s capital. The city imposes a 6% tax on purchases ... but that’s it. There are no extra “local” taxes to worry about. As a result, the overall sales tax rate in D.C. is well below the national average when both state and local taxes are considered.

Income taxes can be high on wealthier retirees. For example, the top rate is 8.95% on taxable income that exceeds $1 million, and that rate is going up to 10.75% in 2022. Another downside for wealthier retirees: For 2022, estates worth $4,254,800 or more are subject to a city estate tax.

5. NEVADA

State Income Tax: None

Average Combined State and Local Sales Tax Rate: 8.23%

Median Property Tax Rate: $533 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: None

Nevada is a good place to spend your retirement years if you don’t want to gamble with your savings. There is no state income tax in Nevada, and there are no estate or inheritance taxes, either.

Nevada also has the fourth-lowest median property tax rate in the U.S. If our first hypothetical couple retired to Nevada and bought a $250,000 home, they could expect to pay about $1,333 per year in property taxes. Our second imaginary couple would pay about $1,866 annually on their $350,000 home. However, Nevada doesn’t offer any special property tax breaks for seniors.

Sales taxes are one area in which retirees won’t get a break. The state imposes a 6.85% sales tax, and counties may tack on up to 1.53% more. As a result, the average combined state and local sales tax rate is 8.23%, the 13th-highest combined rate in the country.

6. SOUTH CAROLINA

State Income Tax: 3% (on taxable income from $3,110 to $6,220) to 7% (on taxable income over $15,560)

Average Combined State and Local Sales Tax Rate: 7.47%

Median Property Tax Rate: $545 per $100,000 of assessed home value

Estate Tax or Inheritance Tax: None

The Palmetto State extends some real Southern hospitality to retirees. Social Security benefits are completely exempt from taxes. In addition, taxpayers age 65 or older can exclude up to $10,000 of retirement income (up to $3,000 for taxpayers younger than 65). Seniors can also deduct $15,000 of other taxable income ($30,000 for joint filers). Plus, veterans who are at least 65 years old can exclude up to $30,000 of income from a military retirement plan (up to $17,500 for veterans younger than 65).

Low property tax rates in South Carolina help retirees, too. The statewide average property tax on a $250,000 home is only $1,363, or $1,908 for a $350,000 residence. Those amounts are the sixth-lowest in the country for houses at those price points. Seniors can also claim a homestead exemption for the first $50,000 of their property’s fair market value. To qualify, as of July 15 of the year the exemption is claimed, you must be at least 65 years old and have been a legal resident of South Carolina for one year.

The lack of an estate or inheritance tax also makes South Carolina a desirable location for wealthy seniors. But sales taxes are on the high end in South Carolina. There’s a 6% statewide levy, and local governments can add as much as 3%. The average combined rate is 7.47%, which is well above average. Counties also impose an annual tax on your motor vehicle’s value.

7. COLORADO

State Income Tax: 4.5% (flat rate)

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