Taxes State Taxes Which States Are the Most Tax-Friendly for Retirees? Some States Don't Tax Pension Income By Tonya Moreno, CPA Updated on January 3, 2023 Reviewed by David Kindness Sponsored by What's this? & In This Article View All In This Article States With No Income Tax Income Tax Breaks For Retirees States You Might Want to Avoid Property Tax Relief Photo: Chaos / Iconica / Getty Images The less money you pay in taxes, the better, when you're living on a fixed income. And some states are more tax-friendly than others. Three main types of state taxes—income tax, property tax, and sales tax—interact to determine the most tax-friendly states if you're retired or you're about to retire. States With No Income Tax Eight states don't impose an income tax on earned income as of 2021: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire taxes only dividend and interest income, so you can hold down a side job here without it costing you in taxes. Tennessee also taxed just dividend and interest income through the tax year 2020. It repealed its tax effective January 1, 2021. States that lack an income tax might seem like a good option, but many collect revenues in other ways. They might have steep property or sales taxes. These can offset the lack of an income tax. State Income Tax Breaks for Retirees Most states that have an income tax also allow retirees to exclude some or all of their Social Security benefits and pension incomes from taxation. Thirteen states exempt pension income for qualified retirees as of the tax year 2021: AlabamaAlaskaFloridaIllinoisMississippiNevadaNew HampshirePennsylvaniaSouth DakotaTennesseeTexasWashingtonWyoming An additional 24 states exempt or provide a credit for a portion of pension income: AlabamaArkansasColoradoDelawareGeorgiaHawaiiIowaKentuckyLouisianaMaineMarylandMichiganMissouriMontanaNew JerseyNew MexicoNew YorkOhioOklahomaOregonSouth CarolinaUtahVirginiaWisconsin States You Might Want to Avoid A few states are less kind to retirees. Not only are some of their tax rates high, but they also fully tax pension income, as well as 401(k) and IRA distributions. According to the Tax Foundation, a nonpartisan tax research group in Washington, D.C., these states and their top tax rates as of the 2021 tax year are: California: 13.3% on incomes over $1 million ($1,198,024 for married filers of joint returns), but Social Security benefits aren't taxed hereMinnesota: 9.85% on incomes over $166,040 ($276,200 for married filers of joint returns)Vermont: 8.75% on incomes over $204,000 ($248,350 for married filers of joint returns)Idaho: 6.925% on incomes over $11,760 ($23,520 for married filers of joint returns), but Social Security benefits that are included on a federal return aren't taxedConnecticut: 6.99% on incomes over $500,000 ($1 million for married filers of joint returns)Nebraska: 6.84% on income over $32,210 ($64,430 for married filers of joint returns)West Virginia: 6.5% on income over $60,000 (for both single filers and married filers of joint returns)Rhode Island: 5.99% on income over $150,550 (for both single filers and married filers of joint returns)Kansas: 5.7% on income over $30,000 ($60,000 for married filers of joint returns)North Carolina: 5.25% on all income, but Social Security benefits aren't taxedMassachusetts: 5% on all income, but Social Security benefits included in federal income aren't taxedArizona: 8% on income over $250,000 ($500,000 for married joint filers) but Social Security benefits that are included on a federal return aren't taxedIndiana: 3.23% on all income, but Social Security benefits aren't taxedNorth Dakota: 2.9% on income over $440,600 (for single filers and married filers of joint returns) Note California will tax you at 8% as of 2021 on income over $46,394. It has one of the highest rates in the country. Property Tax Relief Property taxes can be a burden for retirees with low incomes and high housing costs. But all 50 states offer some type of property tax relief program. Forty states provide homestead exemptions that reduce the assessed value of your home, or tax credits that will reduce your tax bill dollar for dollar. Most states also have special exemptions for senior residents over a certain age. They might also have to meet income requirements. According to Tax-Rates.org, people living in Louisiana, Hawaii, Alabama, Delaware, the District of Columbia, and West Virginia paid the least property taxes compared to their home's value. Nevada's property tax is based on a mere 35% of the fair market value of the property. Most states use 100% of fair market value. States With the Lowest Sales Taxes Only four states don't have a sales tax as of 2021: Delaware, Montana, New Hampshire, and Oregon. Alaska comes close. It doesn't impose a state sales tax. But it does allow cities and counties to levy sales taxes at an average rate of 1.76%. After Alaska, the four states with the lowest combined state and local sales tax rates as of 2021 are: Hawaii: 4.44%Wyoming: 5.33%Wisconsin: 5.43%Maine: 5.5% The five states with the highest combined state and local sales tax rates as of 2021 are: Tennessee: 9.55%Louisiana: 9.52%Arkansas: 9.51%Washington: 9.23%Alabama: 9.22% The Verdict Income taxes might be your first priority if you expect to have a fair bit of income or will continue to work part-time after retirement. Property and sales taxes might be more of a concern if you'll be living on Social Security. These benefits are exempt in many states. Note The state with the best overall tax climate for retired persons depends on the type and the amount of your income, the value of your home, and your cash on hand. It can depend on any tax issues you might have. But some states show clear advantages. These include those that have no income tax, those that exempt pensions and Social Security income, and states that also have low property and sales taxes. These lists don't take climate, access to quality medical care, or cost of living into account. Your financial outlook and what matters to you in a community will determine your unique fit in a retirement destination. Contact your CPA or financial advisor for more personalized guidance on this topic. Which States Don't Tax 401(k) Withdrawals? The states that don't tax pension plans extend those same benefits to retirees with 401(k) plans. Your 401(k) withdrawals won't be taxed in Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. How Much Do You Save in Retirement by Living in a State With Lower Taxes? The more money you have to withdraw in retirement, the more potential you have to save on your tax bill. Someone who withdraws $1.5 million per year could save 13.3% by moving from California to a state without an income tax, like Wyoming. That's nearly $200,000 in savings every year. But most people won't withdraw more than a million dollars every year in retirement, so their tax brackets (and potential savings by moving to a low-tax state) are much lower. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Tax Foundation. "State Individual Income Tax Rates and Brackets for 2021." AARP. "14 States That Don't Tax Pension Payouts." Retirement Living. "Taxes by State." AARP. "12 States That Won't Tax Your Retirement Distributions." Tax Foundation. "State Individual Income Tax Rates and Brackets for 2021." Tax-Rates.org. "Property Taxes By State." Tax Foundation. "State and Local Sales Tax Rates 2021."