Taxes are one of the most important considerations when choosing among the best states to retire. Today’s article shares the six best states to retire from a taxpayer’s perspective.
Best States to Retire in for Taxes: 6 Places with the Lowest State Taxes
What to Consider to Determine the Best States to Retire in for Taxes
To answer this question, one needs to consider several factors. Aside from the quality of life living there can give a retiree, one should also factor in costs, including the cost of living, cost of health care, and state taxes.
State taxes are important because they can significantly impact the amount of retirement income one receives during retirement. State taxes come in different forms, including:
- Income Tax
- Interest and Dividends Taxes — Some states tend to tax interest and dividend incomes more than regular income.
- Sales Tax — When it comes to sales taxes, some states don’t impose it while some levy a high tax rate. California charges the highest state sales tax at 7.25% while the lowest is Colorado at 2.9%.
- Property Tax — Property taxes are a given in all states, which vary according to jurisdiction.
- Estate tax — Estate tax isn’t uniform across the country, with some imposing either estate tax or inheritance taxes. There are also states that impose both. State taxes vary from state-to-state, so it’s ideal to check local laws to get specific information.
So, when talking about states with the lowest taxes, these are the most common taxes that need to be considered.
Overall, the six best places to retire in 2019 based on their state taxes are Alaska, Wyoming, Mississippi, Pennsylvania, Kentucky, and Alabama.
The state of Alaska places the least tax burden on any American, not just on an individual retiree or a retired couple, which makes it one of the best places to live in the U.S. both before and after retirement. Some of the reasons for this include:
- No state income tax
- No state sales taxes
- Residents above 65 years old or their surviving spouses aged 60 and older don’t have to pay property taxes on up to $150,000 of their property’s assessed value.
- No estate and inheritance taxes
Even better, those who have been living in Alaska for more than one year, such as permanent residents, receive annual dividends. The dividends come from the oil wealth savings account of the state, which averages over $1,500 annually.
As the most state tax-free state in the country, Wyoming is the best place to retire based on tax burden. And, it’s not just for retirees as it’s also one of the states with the lowest tax rates for taxpayers of any age.
Residents of Wyoming pay neither income taxes nor sales taxes on groceries and prescription medicines. The state taxes only 9.5% of the assessed value of a property.
Wyoming is able to provide residents with a lower tax burden because it earns from taxes on revenues of oil and mineral companies that operate in the state. In effect, the state can afford to not impose income, estate, and inheritance taxes on its residents.
Given the tax exemptions it gives its residents, living costs in Wyoming are among the 10 lowest in the country, according to World Population Review.
Mississippi provides its retired residents many income tax benefits, which include the following state income tax exemptions:
- Social Security Benefits
- Pension Annuities
- IRA Distributions
- 401(k) Distributions
State income tax comes in between 3% and 5%, with the highest rate imposed on those earning more than $10,000. Meanwhile, the state sales tax rate is 7%.
Mississippi doesn’t tax retirees’ health care and prescription drugs, as well as estates and inheritances. All of these contribute to one of the lowest living costs for any state and good quality of life for any individual retiree or retired couple.
Mississippi retirees also qualify for Homestead Exemption, which exempts the first $75,000 of a home’s value from property taxes.
Pennsylvania doesn’t tax Social Security income, pensions, 401(k)s and IRAs, and all other tax-deferred retirement plans.
It also doesn’t tax sales on basic necessities like food, clothes, and medicines. Sales taxes on all other items are at 6%.
And for people who aren’t retired yet but would already like to settle down in Pennsylvania a couple of years prior to retirement, the state income tax rate is only 3.07%.
The state, however, taxes estates and inheritances of at least $5 million. Hence, retirees need to have good estate and inheritance strategies in place to minimize taxes for their heirs.
Also, property taxes can be quite high, particularly in urbanized areas. Hence, it’s also important to consider the specific retirement place in Pennsylvania to avoid paying high property taxes.
Another one of the best states to retire based on state taxes is Kentucky. Here’s why:
- No taxes on Social Security
- No taxes on up to $41,110 of annual retirement income per person (not household) from annuities, pensions, and distributions
- For residents above 65 years old, Homestead Exemption applies to part of their home’s value
- No estate tax
- Members of a retirees’ immediate family are exempted from state inheritance taxes
Here are the reasons for Alabama’s inclusion on the list of the best places to retire in based on state taxes:
- State tax exemption for pension incomes, such as private, military, and public pensions
- Low-income tax rate of up to 5% for all other incomes
- Retirees aged 65 years and older don’t have to pay state property taxes (though some cities may require it)
- No sales taxes on prescription medicine purchases, though sales taxes on everything else can go as high as 10% in selected areas in the state
- No estate and inheritance taxes
Don’t forget to download, save, or share this handy infographic for reference:
Taxes are very important when it comes to planning one’s retirement finances. It’s because if a retiree doesn’t plan for it well, it may eat up a significant portion of their retirement income.
Because state taxes can comprise a big chunk of one’s retirement taxes, retirement planners need to know the best states to retire in, tax-wise. I hope this guide has helped you narrow down your list of potential states to enjoy your golden years in.
Are you already living in one of these tax-friendliest states? If not, which of these states are you open to retiring in? Let us know why in the comments section below!
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