The Best Places to Retire for Tax Advantages

Every year, half a million retired Americans move to a new location, mainly to places that are less expensive. Traditional retirement areas in the Southwest and South Atlantic have become more crowded and more expensive, so more retirees are looking to the Pacific Northwest, New England and Rocky Mountain states. Family and other factors affect relocation, but state and local taxes are a major consideration as well.

No Income Tax

Nine states have no state income tax. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividend and interest income. A retiree who moves to one of those states from a high income tax state such as New York, New Jersey or California will get a major benefit.

Exempt Social Security

At least 36 states do not tax Social Security benefits, but that number changes over time. Some states exempt all Social Security income, while others have restrictions based on the taxpayer's other income. Oklahoma, for instance, allows deductions for Social Security benefits that are taxed on a federal income tax form, while Kansas exempts those payments for taxpayers with less than $75,000 in adjusted gross income.

Other Retirement Income

Taxes on other retirement income vary widely among states, but most make some allowances for other retirement benefits. Only California, Connecticut, Nebraska, Rhode Island and Vermont allow no exemptions or credits for pensions or similar income. New Jersey, Massachusetts, and Pennsylvania do not allow deductions for individual retirement account contributions.

AARP's List

The American Association of Retired Persons lists Virginia, Maine, Georgia, Washington, Oklahoma, Wyoming, Indiana, Texas, Pennsylvania and New York as having the most affordable cities for retirement, based in part on state and local taxes, but also on general cost of living. It avoided major urban areas, like Dallas-Fort Worth and Houston in Texas, in favor of smaller locales such as Midland, Texas.

Sales Taxes

Sales taxes are easy to overlook because they're included in the price of things bought, but they cost retirees money. Five states have no sales taxes: Alaska, Montana, Oregon, Delaware and Vermont. Hawaii, Wyoming, Wisconsin. Virginia and Maine have the lowest sales taxes. California has the highest.

Property Taxes

Real estate and property taxes are typically imposed at a county level and so vary widely, even within low-tax states. Arizona, for instance, has low property taxes, but a retiree will find lower taxes and housing in Prescott than in the more popular Sedona 63 miles away.

Most Tax-Friendly

The Kiplinger newsletter ranked five southeastern states as among the most tax-friendly for retirees, based on income, property and other taxes. They are South Carolina, Georgia, Alabama, Mississippi and Louisiana. Others on the list were Pennsylvania, Delaware, Wyoming, Nevada and Alaska.