As individuals age, many begin to consider which states tax retirement income and which do not. This consideration is particularly relevant for those contemplating relocating for retirement, as the tax environment can significantly impact financial planning. For those opting to remain in their current locations, understanding the extent to which future income will be taxed is equally important.
The issue of state taxes on retirement income can be categorized according to the type of income involved.
States Without Income Tax:
There are nine states that do not impose a state income tax, which applies to all residents and not just retirees. These states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. However, New Hampshire does tax interest and dividend income, although this policy is set to change in 2025, when such taxes will be eliminated. It is important to note that these states may compensate for lost revenue by imposing higher sales or property taxes.
States That Don’t Tax Retirement Income:
Certain states tax income in general but exempt retirement income from taxation. These states include Illinois, Iowa, Mississippi, and Pennsylvania. Retirees in these states benefit from the non-taxation of their retirement income.
States Exempting Social Security Tax:
A total of 41 states, along with Washington, D.C., do not tax Social Security benefits. This exemption can provide financial relief for individuals relying heavily on Social Security for retirement income. The states in this category include Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming, and Washington, D.C.
For those concerned about Social Security’s financial future, the Social Security Administration offers tools for estimating future benefits. However, with concerns about potential changes in benefits, individuals are advised to plan accordingly.
States That Tax Social Security Benefits:
There are nine states that impose taxes on Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Nevertheless, many retirees in these states pay little to no tax on Social Security benefits due to income or age thresholds that exclude certain residents.
States Without Tax on Any Retirement Income:
When considering all forms of retirement income, 13 states do not tax any form of retirement income. These states are Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. While these states do not tax retirement income, federal taxes may still apply.
Planning for Retirement:
Understanding the tax implications of retirement income is merely one aspect of retirement planning. Individuals should also formulate a comprehensive retirement plan that accounts for their financial needs and sources of income. Diversifying income streams through dividend-paying stocks, pensions, Social Security, annuities, and retirement account withdrawals can provide financial stability during retirement.
