Most Tax Friendly States for Retirees

State-specific tax policies can significantly influence a retiree’s financial well-being, making the decision of where to live a strategic financial choice. A state’s approach to taxing income, property, and purchases can either preserve or erode a nest egg. The variance in tax burdens between states can amount to thousands of dollars annually, making it important to understand these differences when planning for retirement.

Key State Taxes Impacting Retirees

State Income Tax

State income tax is a levy on an individual’s earnings, but its application to retirement income varies. States target three primary sources of retirement funds: Social Security benefits, pension payments, and withdrawals from accounts like 401(k)s and traditional IRAs. While the federal government may tax Social Security benefits, most states exempt them entirely. Only a small number of states impose a tax on Social Security, and even those provide exemptions based on income levels.

The tax treatment of pension income and distributions from retirement accounts is where state policies diverge most. Some states offer full exemptions for all retirement income, while others provide partial exemptions or tax credits up to a certain income threshold. Conversely, some states tax these forms of income just like regular wages.

State Property Tax

Property tax is a locally assessed tax based on the value of real estate and funds services like schools and public safety. The effective property tax rate, the amount paid annually as a percentage of a home’s value, differs greatly between states and even localities. For retirees who have paid off their mortgage, property taxes can be the largest housing-related cost. States with lower effective property tax rates can offer substantial long-term savings.

State Sales Tax

State sales tax is a consumption tax applied to the sale of goods and services, directly impacting a retiree’s daily cost of living. It is calculated as a percentage of the purchase price and collected by the seller. The total sales tax rate a consumer pays is often a combination of a statewide rate and additional local taxes. States with no statewide sales tax or those with low rates can offer a more affordable environment for retirees.

Estate and Inheritance Taxes

Estate and inheritance taxes are levied on the transfer of wealth after death, but they are not widespread. An estate tax is paid by the deceased’s estate before assets are distributed, based on the estate’s total value. An inheritance tax is imposed on the individuals who receive the property, with rates often based on the heir’s relationship to the decedent. Only a minority of states impose either tax, and they have an exemption threshold, meaning the tax only applies to assets valued above a certain amount.

Analysis of Top Tax-Friendly States

States With No Income Tax

Wyoming does not levy any income tax, so Social Security, pensions, and retirement account withdrawals are not taxed at the state level. It has one of the lowest average combined state and local sales tax rates. Property taxes are also among the lowest in the country.

Nevada has no state income tax, offering savings for those relying on retirement distributions. Sales taxes are higher than in some other tax-friendly states, which can impact the cost of living. Property taxes are considered moderate.

Florida does not have a state income tax, meaning all forms of retirement income are free from state taxation. The state’s average combined sales tax is in the middle range nationally. Property taxes are close to the national average, though homestead exemptions can provide relief for homeowners.

Alaska has no state income tax and no statewide sales tax, though some localities impose their own. Property taxes can be higher than in other states on this list. The state also provides an annual dividend from its oil wealth savings to most residents, which can supplement retirement income.

South Dakota has no income tax, making it favorable for retirees drawing from pensions and savings. Its sales tax rates are low to moderate, but property taxes are high compared to other states with no income tax.

Texas has no state income tax, which helps in managing retirement income. However, the state has some of the higher sales and property tax rates in the country, which can offset the income tax savings.

Tennessee does not have a broad-based income tax. The state has a high sales tax rate but moderate property taxes.

New Hampshire does not tax wages, Social Security, pensions, or 401(k) withdrawals, and as of 2025, it no longer taxes interest and dividend income. The state has no sales tax but has very high property taxes.

States With Favorable Retirement Income Exclusions

Illinois does not tax distributions from qualified retirement plans, including 401(k)s, IRAs, and pensions, and Social Security benefits are also exempt. Property taxes are among the highest in the nation. The state has a moderate sales tax and an estate tax for high-value estates.

Mississippi exempts all qualified retirement income from its state income tax, including Social Security, IRAs, 401(k)s, and pensions. The state has a high sales tax rate but low property taxes.

Pennsylvania does not tax Social Security benefits or distributions from retirement accounts like 401(k)s and IRAs. The state has a flat, low income tax rate for other income. Property taxes are high, but sales taxes are moderate, and the state has an inheritance tax.

Additional State Tax Considerations for Retirees

Local Taxes

The overall tax burden in a state is not solely determined by statewide policies, as local governments like cities and counties levy their own taxes. For instance, a state with no income tax might have municipalities that impose a local income or wage tax, adding an unexpected expense. Local sales taxes can also increase the total rate paid on goods and services. A state with a moderate statewide sales tax can have one of the highest total rates when combined with local add-ons, so researching a specific locality’s tax structure is important.

Property Tax Relief Programs

Many states offer programs to ease the property tax burden for older residents, making a high-tax state more affordable. A common form of relief is the homestead exemption, which exempts a certain amount of a home’s value from taxation. Some states offer enhanced homestead exemptions for seniors or those with limited incomes. Another program is the “circuit breaker,” which provides a tax credit when a property tax bill exceeds a percentage of the homeowner’s income. These programs are designed to prevent seniors from being “taxed out” of their homes due to rising property values. Property tax deferral programs are also available in some states, allowing eligible seniors to postpone payments until the home is sold.

Sales Tax Exemptions

A sales tax’s impact depends on what goods and services are taxed, as a high rate is less burdensome if necessities are exempt. The most common exemption is for groceries, which offers a financial advantage for retirees. Another frequent exemption is for prescription and non-prescription drugs, a major expense for many seniors. Some states also exempt certain medical services, further reducing the overall tax load for retired residents.