10 States to Relocate for Lower Taxes

When you think of retirement, you might think of puttering around the house, catching up on projects, and spending time with family and friends. But a wiser plan might be to ditch the homestead and the neighborhood pals and strike out for greener pastures. Where you live can dramatically affect how much of your retirement money stays in your pocket. Relocating to an area with lower taxes can help you stretch your retirement funds considerably.

Morning Street, Charleston, SC by faungg on Flickr

There may be no escaping federal income taxes, but state income taxes can sneak up and take a significant bite out your wallet. Your first thought may be to head for a well-known retirement destination with no state income tax such as Florida or Texas, but there are many issues to weigh before making a move, such as:

  • State and local sales tax
  • Property tax
  • Estate and inheritance taxes
  • Housing costs
  • Insurance premiums
  • Relocation and annual travel costs
  • Quality of life factors (recreation, security, lifestyle)

A major consideration is the state’s laws governing taxes on different types of retirement income. Different states have different rules governing taxes on Social Security income, government, military or private pensions, and disbursements from retirement accounts such as IRAs and 401(k)s. Review state tax laws that apply to your particular retirement portfolio when considering relocation.

To help in the hunt for ideal places to relocate, here is a list of 10 retiree-friendly states:

1. Alaska. While this polar state might not be everyone’s idea of a retirement paradise, there is a certain undeniable appeal to the fact that the state has no state income tax and no state sales tax. In addition, all residents (after the first year) receive a hefty annual dividend check from the state’s oil coffers. Many older residents are exempted from property taxes on the first $150,000 of assessed value.

2. Alabama. With a mild southern climate, and attractive real estate prices, Alabama is an overlooked retirement spot. Homeowners over 65 are exempt from state property taxes and the state has a lower-than-average state sales tax of 4%. There are no taxes on pensions or Social Security.

3. South Carolina. South Carolina is another state popular with snowbirds fleeing colder climes and seeking lower taxes. There is no Social Security tax and couples can deduct the first $30,000 of retirement income from their state taxes. Up to $10,000 in military benefits can also be deducted. State sales tax is 6% but prescription drugs are exempted. The sales tax falls to 4% at age 85. Property taxes are low and older taxpayers qualify for a homestead exemption that further reduces their tax liability.

4. Mississippi. Property taxes are some of the lowest in the U.S. and there are no pension or Social Security taxes. Distributions from IRAs, 401(k)s and other qualified retirement accounts are also excluded.

5. Nevada. Nevada has no state income tax and food and prescription drugs are exempted from the 6.85% state sales tax.

6. Pennsylvania. Social Security and pension income are exempt in PA. The Keystone state also keeps its paws off retirement accounts such as IRAs and 401(k)s. Be aware that property taxes vary widely from place to place.

7. South Dakota. There is no tax on Social Security benefits or on any other pension income. The state sales tax is a below-average 4%, and prescription drugs are exempt. Homestead exemptions and other tax reductions are available to seniors.

8. Tennessee. While there is no tax on Social Security or other pension income, dividends and interest are subject to tax. The state sales tax, at 7%, is on the high side.

9. Wyoming. Pensions and Social Security income get a free ride in this income-tax-free state. Sales tax is a low 4%, and prescriptions and food are untaxed. These facts, plus low property tax rates give Wyoming residents one of the lowest overall tax burdens in the country, putting this state high on the list of retiree-friendly places to relocate.

10. Delaware. This tiny state has no state sales tax, and state income taxes are on the low side with exemptions for Social Security and other qualified income for taxpayers over 60. A credit toward property tax is also available for homeowners over 65.

Comments

  1. I think you mean that Delaware has no state *sales* tax (“This tiny state has no state income tax, and state income taxes are on the low side”)

    Texas is another state with no state income tax and fairly warm climate.

    • That is what I meant, thank you for pointing that out. I made a quick correction. Texas definitely has Deleware beat in terms of climate, unless you don’t enjoy Texas summers.

  2. I probably should have presented the sales tax figures as a “state general sales tax,” because as you correctly point out, many locales add county/city taxes to this rate.

  3. Be glad you don’t live in Canada if you disdain the taxman! Sure we have lots of social services but we pay for it in tax, tax, tax, tax!
    In Canada Alberta is the most tax friendly as they have no provincial (state) tax on consumer goods and IIRC they have lower provincial income tax than other provinces.
    I lose 28% of my pay cheque to taxes, employment insurance and the Canada Pension Plan before some other deductions occur. Ow!
    Alas, I don’t pay health insurance.

    • Interesting. What are your thoughts on the level of care you do receive in Canada? As you are aware, many here in the US assume we’re headed for the Canadian health care model.

      • I consider the level of care to be great. I think it is a common myth / scare tactic in the U.S. to say Canadians have super long wait times and poor service. Not the case from my experience. My friend had a detached retina a few months ago. He went to emergency, was with a specialist within 3 hours and was booked for proper care within 12 hours. All the tests were done. It is a prioritization thing here. If you require immediate care, you get it. If you want a skin flap removed, well guess what? Unless it is cancerous you’re going to wait as there are people who are much higher on the priority list. Now, the rich with great insurance won’t like this – but they are not the majority! Social health is a hot topic (as is almost any social program in the U.S. that the tax payer has to pay) but we find the system to work great.

        Last year I was sick – and I mean “could die” sick. For “normal” check ups with my doctor it may take 2-3 weeks to get in to see him. With what was going on with myself (c-difficile, look it up – nasty) the symptoms meant I saw him the say I finally was too sick to avoid seeing the doc. He had the tests ordered same day (samples had to be produced over 48 hrs). There was a rush on the testing (done in less than 48 hrs) and the appropriate meds applied. Numerous people have died in North America from C-Diff, so it was a priority and got dealt with promptly.

        As for Doctor proficiency, we find our docs pretty good! A lot leave for greener pastures south of the border unfortunately, and far too many specialize but I assume thats and issue wherever you go!

        • Found your discussion about the Canadian healthcare system very interesting. I lived many years ago in the UK and compared to the US system I absolutely loved it. Just like Canada no long waits if it is an emergency. As for long waits for non emergency visits well that wasn’t even as bad as getting appointments in the Boston Ma. area. I think people in the US need to be aware of the lies that they are being told about government run healthcare in other countries. Who do you think profits from the lies, none other than the for profit insurance companies.

  4. Frugal Dad:
    Great List (Im only 20, but I had no idea about the south carolina tax levels) Quick note on wyoming – State sales tax is 4% as you mentioned, but counties typically increase this level through a vote. My county votes every 4 years on our extra 2 pennies in tax (votes dont come up the same year). My county is one of the higher tax places (at 6%) but most have added on at least 1 penny, making the total tax rate 5%
    Jeff

    • Just think Jeff- you could live in my fair city in Kansas and be paying 10.1 % sales tax! We moved rural- thinking we would get lower taxes- HA! We pay higher taxes here than anywhere we have lived.
      I am glad you are including property tax AND income. Some places look like good deals and really are not so good (like Washington St.)
      Moving to a better tax place in five years.

  5. I don’t understand your methodology necessarily for picking these states. There are several states without any income tax, and they make it up for sales tax. Some have state sales tax but no income tax. You are talking about several things here which make it hard to determine unless you bring numbers into the game, and determine a scenario which makes sense for someone. If someone owns a bunch of crap, and does not plan on purchasing much – going to a state with little to no sales tax does not do them much good. Sites I would look at, and gather info would be the following:
    https://secure.wikimedia.org/wikipedia/en/wiki/State_income_tax
    https://secure.wikimedia.org/wikipedia/en/wiki/Sales_taxes_in_the_United_States
    http://www.kiplinger.com/tools/retiree_map/index.html (great magazine by the way)
    http://articles.moneycentral.msn.com/Taxes/Advice/PropertyTaxesWhereDoesYourStateRank.aspx

    I am not saying your numbers are wrong, however I think you have to look at each state differently. Pick Washington. They have high property values, and thus property tax in the Seattle area, however if you go east, between the Rockies and the Cascade Mountains, there is great towns (Spokane, etc.) and they have low property tax and low costs, no state income tax, etc. Yes the population density is on the west coast, but if you are willing to live near Spokane, you can get a great value. I think it all depends on the areas you are looking at. The same can be said (in reverse) for Oregon if you live someplace like Eugene and not near Portland. To not pick on a west coast bias, look at Pennsylvannia, one of your states you list as one of the cheaper ones to live in. If you are near Philly or Pittsburgh, you are hosed on property taxes. Plus several things occur in that state most people don’t know is that in several areas you are required to only use licensed professionals to do home repairs. You are required to call a roofer to clean gutters, a plumber to replace a broken $2 flapper in a toilet, etc. To even buy the parts, you are required to show your license.

    There are 100 different things to look at, however, the easiest is to determine your lifestyle, what are you going to do, and pick a spreadsheet and work through it. Good luck.

  6. What about good states for people who still work for a living (and have income taxes to avoid)? The list could be much different vs. an older retiree without much income to shield from taxes.

    Also, are there any possible strategies to call one state “home” for tax purposes while living and/or working in another state with higher taxes?

  7. @ queen of the road and @ tommy z:
    Yes, I forget which Dakota it is (south or north), you can claim residency in that state, not own land, pay a utility, and they have no state income tax or anything. You don’t have to show up at the DMV to get your license plates, you can do it online or by mail. They even have a booming industry of PO boxes with “real sounding street names” where you can forward to anywhere you want in the US. I think it is North Dakota. This is why a majority of RV are from the Dakota’s since they have very limited tax liability and can claim residence in those states.

  8. I’m pretty happy living outside of Houston, TX. No state income tax, 8.25% sales tax on anything but groceries, and 3.1% property taxes. It’s not the best ever, but the cost of living is low enough to balance it all very nicely. :-)

  9. From a german point of view, you live in paradise! After we have paid income tax and compulsary health, unemployment, retirement and long term care insurance, we have about half of your income left. And to top it, we pay 19% value added tax for all goods and services with very few exceptions, e.g. food (9%).

  10. @Hilde – It sounds like Germany has a much better system. At least you get the benefit of healthcare with your taxes. Our taxes are easily over 50% when you add up Federal Income + State Income + Property Taxes + Government Fees (licenses, fines, applications, etc) + Social Security + Social Security (paid by employer) + Medicare + Tariffs + Corporate Taxes (that could otherwise be paid in employee wages) Sales Tax + Gas Tax + INFLATION (hidden tax).

    • QTommy Z – Oh, I forgot the social security paid by employer, which is the same amount as paid by the employee, and the property tax, which is actually very low (we pay about 300 € for a average-sized house) and the gas tax. We pay 1,50 € for one liter of gas (8 $ per gallon?), and more than half of it is tax.

      • Ja aber Sie haben Sie den octoberfest und Curry Wurst. Auch die Frauen sind schön, aber die ist möglicherweise, weil mein Großvater von Berlin war.

  11. Frugal Dad,

    We spent 6 weeks in Alaska this past summer/early fall. There is no STATE sales tax, but the boroughs have sales tax, at least most of them. Also, the cost of everything else is a heck of a lot more than in the lower 48, and I’m not talking about the touristy areas — we spent most of our time away from the tourist cities. In conversation with locals, they were quick to point out their high cost of goods, but they all loved living in Alaska.

  12. A couple of points. States that appear attractive today may quickly become unattractive. They may have huge deficits, face insolvency, and need to raise revenue. In that case their attractive tax regimes may disappear. So be careful.

    The other point deals with the question of the attractiveness of the Canadian healthcare system. If your need is critical and urgent it is usually taken care of in a timely way. If it is urgent but not critical, like if you need a hip replacement and are unable to walk, you will likely be placed at the end of a long line up. Unless you bribe a doctor to improve your position, as currently happens in Quebec. The line up could be many months.

    Canadian politicians rarely if ever use the public system. They either get preferred treatment or pay for private treatment where available. And if not available go to the US where they can buy the best. As was the case with one of the provincial premiers in the last year.

  13. A couple of points. States that appear attractive today may quickly become unattractive. They may have huge deficits, face insolvency, and need to raise revenue. In that case their attractive tax regimes may disappear. So be careful.

    The other point deals with the question of the attractiveness of the Canadian healthcare system. If your need is critical and urgent it is usually taken care of in a timely way. If it is urgent but not critical, like if you need a hip replacement and are unable to walk, you will likely be placed at the end of a long line up. Unless you bribe a doctor to improve your position, as currently happens in Quebec. The line up could be many months.

    Canadian politicians rarely if ever use the public system. They either get preferred treatment or pay for private treatment where available. And if not available go to the US where they can buy the best. As was the case with one of the provincial premiers in the last year.

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