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The Lowest Tax States for Retirees

by Kimberly Palmer
Thursday, April 1, 2010
US NEWS

If you're working 40 hours a week or more in a cubicle, then you might enjoy fantasizing about the luxury of retirement. Will you spend it on the beach, drink in hand? Or hiking through the National Parks? Do you want to move from gritty urban living to the country?

The cash you have on hand to fund that fantasy will depend, at least partly, on which state you choose to settle down in. That's because states vary widely on the taxes they charge retirees. So before you start scrolling through real estate listings looking for your perfect beach house for your older years, check out this list of the best and worst states for retirees, based on analysis of income and sales tax by the firm CCH:

For High-Earners:

If you'll be collecting a sizable income in retirement, from pensions, investments, or other sources, then you'll want to live in a state with low income tax. These seven states are best because they charge no taxes on individual income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Runners-up include New Hampshire and Tennessee, which tax dividend and interest income only. Pennsylvania and Mississippi exempt pension income from taxation, while Michigan and Maine exempt part of pension income.

The worst states for retirees with high incomes include California, the District of Columbia, Hawaii, Iowa, Maine, New Jersey, Oregon and Vermont. They all have a maximum income tax rate of 8 percent or higher. Retirees should check out the tax rate that applies to their income, though, because only the highest earners are charged the maximum rate. (California's 10.55 percent tax rate applies only to those bringing home $1 million or more, for example.)

For Big Spenders:

States charge different amounts of sales tax, which means everything from dinners out, clothes, and cars can cost significantly less in low or no-sales tax states. These five states are best for big shoppers, because they charge no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Runners-up include Colorado, which has a low 2.9 percent sales tax rate, and Alabama, Hawaii, Georgia, Louisiana, New York, South Dakota, Virginia, And Wyoming, which charge a 4 percent rate.

The worst state for big shoppers is California, which charges an 8.25 percent sales tax rate. Runners up, with a 7 percent rate, include Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.

The overall winner for retirees seeking to minimize their taxes? Alaska. With no income tax and no sales tax, seniors can keep most of their money to themselves, while fishing, hiking, and cruising their way around the state. For those who prefer to stay in the lower-48, New Hampshire offers a close second choice, and boasts of the White Mountains and beautiful fall foliage.

The most expensive, and therefore worst, state for retirees is California. Seniors in the highest tax bracket not only pay a whopping 10.55 percent income tax rate, but they also pay an 8.25 percent sales tax each time they go shopping. For a few people, though, the draw of Napa Valley, Hollywood celebrity sightings, and Yosemite might be worth the cost.

For a more detailed analysis of the taxes states charge retirees, see the full report by CCH.