Best and Worst States for Retirement Taxes

Why State Taxes Matter in Retirement

Federal taxes get the most attention, but state and local taxes can take an additional 3% to 13% of retirement income depending on where you live. For a retiree withdrawing $80,000 per year, the difference between a tax-friendly state and a high-tax state can easily exceed $8,000 annually — money that compounds significantly over a 25-year retirement.

The challenge is that no single metric captures a state's full tax picture. A state with no income tax may have high property taxes or sales taxes. A state that exempts Social Security may fully tax IRA withdrawals. Evaluating states requires looking at the complete tax burden for your specific income profile.

States With No Income Tax

Nine states impose no state income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire taxes only interest and dividends (though this is being phased out). For retirees with significant IRA withdrawals, pensions, or investment income, these states offer a clear advantage on the income side.

However, no-income-tax states often compensate with higher sales taxes (Texas, Tennessee, Washington), higher property taxes (Texas, New Hampshire), or limited public services. Florida stands out as the most consistently tax-friendly for retirees because it combines no income tax with moderate property taxes and a generous homestead exemption.

States That Don't Tax Social Security

The majority of states do not tax Social Security benefits. As of 2025, only about nine states tax Social Security at all, and several of those offer significant exemptions based on age or income. States that fully exempt Social Security include all nine no-income-tax states plus many others like Pennsylvania, Illinois, Mississippi, and Alabama.

States that still tax some Social Security benefits include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia — though most of these offer partial exemptions. If Social Security is a major portion of your retirement income, avoiding these states can save thousands per year.

States That Exempt Retirement Income

Several states go beyond Social Security and exempt some or all retirement income from state taxes. Illinois exempts all retirement income from IRAs, 401(k)s, and pensions. Pennsylvania exempts most retirement distributions after age 59 and a half. Mississippi exempts all qualified retirement income.

Property Tax Considerations

For retirees who own their home, property taxes are often the largest state and local tax expense. Effective property tax rates vary dramatically — from under 0.3% in Hawaii to over 2% in New Jersey, Illinois, and Connecticut. On a $400,000 home, that is a difference of nearly $7,000 per year.

Many states offer property tax relief specifically for seniors: homestead exemptions (Florida, Texas), property tax freezes for seniors (many states freeze assessed values at age 65), circuit breaker programs that cap property taxes as a percentage of income, and outright deferrals that let retirees postpone property taxes until the home is sold.

Overall Tax Burden Comparison

The Tax Foundation publishes annual state-local tax burden rankings. As of their most recent analysis, the states with the lowest overall tax burden include Alaska, Wyoming, Tennessee, South Dakota, and Florida. The highest burden states include New York, Connecticut, New Jersey, California, and Illinois (despite its retirement income exemption, high property and sales taxes push it up).

For retirees specifically, the best states combine low or no income tax on retirement income with moderate property taxes and reasonable cost of living. By these criteria, the consistently top-ranked states for retirees include:

• Florida: No income tax, moderate property taxes, homestead exemption, no estate tax.
• Wyoming: No income tax, low property taxes, no estate tax, but higher cost of living in resort areas.
• Nevada: No income tax, moderate property taxes, but high sales tax and cost of living varies by city.
• South Dakota: No income tax, low property taxes, no estate tax, affordable cost of living.
• Pennsylvania: Flat 3.07% income tax but exempts all retirement income, moderate property taxes outside Philadelphia.

The Worst States for Retirees

On the other end, some states impose a particularly heavy burden on retirees:

• California: Top marginal rate of 13.3% with no retirement income exemptions beyond the standard deduction.
• New York: Top rate of 10.9% plus New York City's additional 3.876%, though it does exempt some pension income.
• Connecticut: Taxes Social Security for higher earners, high property taxes, and estate tax with a low exemption.
• New Jersey: Highest property taxes in the nation, though it does exempt Social Security and offers partial retirement income exclusions.

Relocation Planning

If you are considering relocating for tax reasons, the savings need to be weighed against moving costs, distance from family, health care access, cost of living differences, and quality of life. A state with no income tax does not help if housing costs are double what you pay now.

Before committing, model your actual tax bill in the target state using your specific income sources. Run the numbers for your Social Security, pension, IRA withdrawals, investment income, and property tax on comparable housing. The result may surprise you — states with income taxes but generous retirement exemptions (like Pennsylvania or Illinois) can sometimes beat no-income-tax states for retirees whose income is primarily from retirement accounts.

Also be aware of domicile rules. Simply buying a home in Florida does not make you a Florida resident for tax purposes. You need to establish domicile by spending the majority of your time there, updating your driver's license and voter registration, and severing financial ties with your former state. States like New York and California aggressively audit departing high-income residents.

This article is for educational purposes only and does not constitute financial, tax, or legal advice. Tax laws change frequently. Consult a qualified tax professional for guidance specific to your situation.