The Most Tax-Friendly States for Retirees in 2023

As you approach retirement, one significant concern might be the tax implications on your hard-earned income. Understanding how various states tax retirement income can help you plan better for your golden years. Whether you’re relying on Social Security, pension plans, or retirement accounts, some states offer more favorable tax conditions than others. Here’s a comprehensive guide to the most tax-friendly states for retirees in 2023.

Key Takeaways

If you’re considering retirement, you’ll be pleased to know:

• Illinois, Iowa, Mississippi, and Pennsylvania rank as some of the most tax-friendly states.
• A total of 38 states do not tax Social Security income.
• 37 states offer exemptions on most military retirement pay.
• 15 states allow for tax-free pension income.
• Additionally, nine states have no income tax at all.

States That Don’t Tax Retirement Income

Many states are working towards making retirement more manageable financially. Below we delve into specific states renowned for tax exemptions related to retirement income.

1. Arkansas

Arkansas provides excellent tax relief for retirees. Key points include:

• Exemptions for up to $6,000 from public and private pension plans and IRA distributions for those above 59½ years old.
• No taxation on Social Security income or military retirement pay.
• An absence of estate or inheritance taxes ensures your assets remain intact for your heirs.

2. Illinois

Illinois offers another attractive option for retirees with the following benefits:

• Exemptions on pension income, 401(k), IRA, and Social Security benefits from state taxes, as well as military retired pay.
• Note that Illinois does impose taxes on other kinds of investment earnings and has estate and inheritance taxes.

3. Iowa

Iowa has made significant strides in becoming more retiree-friendly:

• As of January 2023, pensions, 401(k), and IRA income are no longer taxed for those over 55 years old.
• A flat tax rate of 3.8% is set to be implemented by 2025, along with the elimination of inheritance taxes.

4. Mississippi

In Mississippi, retirees can breathe easy knowing:

• Retirement plan distributions, pension income, Social Security benefits, and military retirement pay are all exempt from state taxes.
• The state does not levy estate or inheritance taxes.

5. New Hampshire

New Hampshire provides a unique tax environment:

• While Social Security and pension income are not taxed, it does tax certain retirement account distributions classified as interest or dividends.
• As of January 1, 2025, the state will eliminate taxes on interest and dividends, further enhancing its appeal for retirees.

6. Pennsylvania

Retirees in Pennsylvania enjoy significant benefits:

• The state does not tax Social Security or pension income.
• A flat income tax rate of 3.07% makes it one of the lowest in the nation for earned wages. Additionally, a property tax/rent rebate program is available for seniors.

7. South Carolina

South Carolina remains a favorable option due to:

• Exemption from taxes on Social Security income, with military retirement pay also exempt as of 2022.
• For those aged 65 and older, the first $10,000 of retirement plan income is exempt.

States With No Income Tax

Additionally, nine states offer the benefit of no income tax at all, which can be a considerable advantage for retirees managing fixed incomes. These states include:

• Alaska
• Florida
• Nevada
• New Hampshire (no income tax on wages, but taxes on certain dividends)
• South Dakota
• Tennessee
• Texas
• Washington (taxes only capital gains of high earners)
• Wyoming

These states provide automatic tax relief, enabling retirees to retain more of their income.

FAQs on Taxes for Retirees

At What Age Do You Stop Paying Taxes on Your Pension?

In the U.S., there’s no specific age at which you stop paying taxes on your pension, as taxes depend on income brackets rather than age. Most pensions are subject to federal and state taxes. Required minimum distributions (RMDs) for tax-deferred accounts start at age 73.

How Can I Reduce Taxes in Retirement?

To effectively manage taxes in retirement, consider strategies such as:

• Strategically plan withdrawals from taxable and tax-deferred accounts.
• Convert traditional IRAs to Roth IRAs to avoid future RMDs.
• Delay taking Social Security benefits until age 70 for higher payouts, reducing early tax burdens.
• Explore charitable donations to lower overall taxable income.

How Is Social Security Taxed in Retirement?

Social Security benefits may be taxed based on your total income. For single filers, if combined income exceeds $25,000, up to 50% of benefits may be taxed, and if it exceeds $34,000, up to 85% may be taxable.

The Bottom Line

Understanding state taxes on retirement income is crucial for retirees. While some states offer significant tax breaks on Social Security, pensions, and savings, others can create a tax burden that eats into your retirement savings. If you reside in a state with no income tax or favorable exemptions, you can enjoy a more financially secure retirement. As tax laws can fluctuate, consider consulting with a financial advisor to help determine the best overall strategy for your particular circumstances.