Choosing where to retire will be one of the most important decisions you make. One factor that impacts this decision is local taxation law. How much your retirement income is taxed may have you considering a move in your golden years. After a little research, you will soon learn that local taxation varies greatly from state to state. In fact, there are some states that don’t tax retirement income at all. Here are a few financial factors you should include when choosing where to put down roots in your retirement years.
States That Don’t Tax Personal Income
If you want to maximize you savings during retirement, there are currently nine states that don’t tax retirement or personal income. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have income taxes. However, New Hampshire and Tennessee do tax dividends and interest for the time being. But, both states have plans to phase out these taxes. Tennessee will see these changes in 2021 while New Hampshire will phase it out by 2025.
Taxation of Retirement Income by State
The taxation laws and treatment of retirement income in the remaining states vary greatly. Therefore, you should familiarize yourself with the local laws before you make any decisions. Some states will allow partial exemptions for pensions and social security income. However, others will tax the entire amount of your retirement income. If you are unsure how local tax laws in your state apply to Social Security benefits, you can read more here.
If you live in Illinois, Mississippi, or Pennsylvania, then there is some good news! These states exempt all your pension income from taxes. Although, this 0nly applies to qualified individuals.
Partial Exemptions and Credits
Another common structure for tax on retirement income is to allow a partial exemption or provide a credit for part of your pension income. If you settle in one of the following states, you will receive some relief since these states don’t tax your full retirement income: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin.
An alternative structuring in other states is when pension income is tax included. This applies to residents of Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Vermont and West Virginia.
The Most Tax-Friendly States for Retirees
In 2019, Kiplinger compiled a list comparing the tax burden for retirees state by state. To complete the analysis, they used the same hypothetical household as the constant variable. The purpose is to compare how the burden of income, property and sales tax varied across the country.
The rankings are based on a family of four with a yearly income of $150,000 and $10,000 in dividends. Additionally, Kiplinger included $10,000 in mortgage interest on a home valued at $400,000. It then applied each state’s local income tax to these figures. Based on these metrics, here are the top 10 states that are the most tax-friendly towards retirees:
5. South Carolina
Keep in mind that these rankings are based on a hypothetical model. Although, it may be different for your personal financial situation. If you are considering a move in your retirement years, be sure to do your homework. Lastly, don’t be afraid to seek out professional advice to help you plan for retirement. Choosing where to retire is a huge decision. Moreover, it is not one that should be made lightly. Moving to one of the states that don’t tax retirement income could help stretch your retirement savings through your golden years.
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