States That Don’t Tax Your Retirement Income

Preparing for retirement requires dedication and long-term planning. Whether you’re contributing to Social Security, building a retirement account, or securing a pension, the overarching goal is to enjoy your golden years without financial stress. However, understanding how taxes, especially state taxes, will impact your retiree financial situation is crucial. Here, we explore states that offer exemptions on taxes for various forms of retirement income, including Social Security, 401(k) withdrawals, and pensions.

Why It Matters to Be Tax Savvy in Retirement

While thoughtful planning can set you up for comfortable living in retirement, navigating through taxes — both federal and state — can determine how much of your nest egg you actually get to keep. Federal tax obligations continue into retirement, but some states provide relief by exempting certain forms of retirement income from state taxes.

States That Exempt Retirement Income from Taxes

Arkansas

In Arkansas, retirees can exempt up to $6,000 annually from IRA distributions and pension plans if they are over the age of 59½.

Illinois

Illinois provides a blanket exemption for all forms of retirement income, which includes Social Security, withdrawals from retirement accounts, and pensions. This means residents can keep more of their hard-earned money.

Iowa

In Iowa, Social Security benefits are entirely exempt from state taxes. Distributions from retirement accounts and pensions are also tax-exempt for individuals over the age of 55.

Mississippi

All retirement income in Mississippi, including Social Security benefits and withdrawals from retirement accounts, is exempt. However, early withdrawals may be subject to state taxes.

New Hampshire

New Hampshire is unique in that Social Security and pension incomes are exempt from taxes, although interest or dividends from retirement accounts are taxable. This tax on investment income is scheduled to phase out.

Pennsylvania

In Pennsylvania, retirees benefit from a comprehensive tax exemption on all forms of retirement income, including Social Security, retirement account withdrawals, and pensions.

South Carolina

In South Carolina, Social Security benefits are entirely exempt. Additionally, retirees can deduct retirement income: $3,000 if younger than 65 and $10,000 if 65 or older.

States Without State Income Tax

Certain states do not impose a state income tax at all. Living in these states can significantly reduce your financial burden in retirement. The following states currently do not tax income, making them attractive options for retirees:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Social Security Benefits and Taxes

It’s worth mentioning that while 41 states and Washington, D.C., do not tax Social Security benefits, others do. The states that currently tax Social Security include:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia (this tax is set to phase out by 2026)

Federal Taxes on Social Security

Even if you live in a state that does not tax Social Security, you may still face federal taxes on your benefits. The IRS utilizes a formula that takes into account your combined income to determine the taxable portion of your benefits.

Combined income consists of:

• Your Adjusted Gross Income (AGI)
• Half of your annual Social Security benefits
• Any nontaxable interest

For instance, if your AGI is $20,000, you receive $20,000 in Social Security, and you have $500 in nontaxable interest, your combined income would be $30,500.

Understanding Taxable Benefits

Here’s a breakdown of how your income can affect the taxable amount of your Social Security benefits:

• If you file as Single and your combined income is:

  • Less than $25,000: 0% is taxed
  • $25,000 to $34,000: Up to 50% is taxable
  • More than $34,000: Up to 85% is taxable

• If you file as Married Filing Jointly:

  • Less than $32,000: 0% is taxed
  • $32,000 to $44,000: Up to 50% is taxable
  • More than $44,000: Up to 85% is taxable

Final Thoughts on Maximizing Retirement Income

Being proactive about tax implications can significantly enhance your retirement income. If you’re concerned about falling behind in your retirement savings, various strategies can help you maximize your Social Security benefits, potentially adding as much as $23,760 annually to your income.

For retirees looking to retire comfortably, knowing which states offer tax exemptions on critical retirement income streams can make a substantial difference. Take the time to assess your options carefully.

For additional insights and strategies on maximizing your retirement savings, consider exploring dedicated financial resources or advisory platforms.

Discover More

Learn more about the strategies that can help you take full advantage of Social Security benefits, ensuring a retirement filled with peace of mind and financial stability.