11 States With No Tax On Retirement Income in 2023

If you’re nearing the end of your active working phase of your life, you may be wondering how your taxes will change. After all, you’ve been paying taxes on your income for your entire career. Surely, there must be some relief when you finally stop working, right? Well, it turns out that there are a few states that don’t tax retirement income at all. That means that you could potentially keep more of your money in retirement if you live in one of these states with no tax on retirement revenue.

In this blog post, we’ll first discuss the benefits of paying less in retirement taxes. Then, we’ll also take a look at the states with no tax on retirement income. Finally, we’ll give you some additional factors that you may want to consider as well when selecting a state to retire in. 

The Benefits Of Paying Less In Retirement Taxes

Retirement taxes can be a big expense for retirees. In some cases, these taxes can amount to as much as 50% of your income. Fortunately, there are many states that have eliminated such taxes altogether. By living in one of these states with no tax on retirement income, you will save on both the upfront cost of retirement taxes and the ongoing cost of paying tax on your retirement income.

In most cases, it is a good idea to pay less taxes on retirement income. This is because you will have more money in retirement if you live in a state with no tax on retirement income. In some of these states, your social security benefits and pension payments may not be taxed. As a result, you will have more money available to save and spend during your retirement years.

Furthermore, by paying less in taxes during your retirement years, you can keep more of the money you earned. This means you will have more disposable income to spend time with family and enjoy life outside of work.

State Income Taxes: What You Need To Know About Each State’s Policy

When you’re preparing to retire, it can be important to understand the state income taxes that apply to you. There are a few states with no tax on retirement income, which can be a great way to save on taxes during your retirement years. However, you will still need to pay federal taxes on any retirement income. So make sure you check with your state’s tax policy before retiring so that you know for certain if this applies to you.

Some states tax all income, while others only tax certain types of income. For example, Alaska exempts retirement income from state taxes. Other states like California and New York require retirees to pay both state and federal taxes on their retirement income. Make sure you know which state applies to you before retiring so that you don’t end up paying too much in taxes during your golden years.

11 States with No Tax on Retirement Income:

Based on our findings, these first list of 9 states, do not levy any state income tax at all.

  1. Wyoming.
  2. Washington.
  3. Texas.
  4. Tennessee.
  5. South Dakota.
  6. Nevada.
  7. Florida.
  8. Alaska.

In addition, while these states do levy state income tax on earned income, retirement income from sources including Social Security benefits and distributions from 401(k) plans, IRAs, and pension plans is not subject to taxation. 

  1. Illinois
  2. Mississippi
  3. Pennsylvania

Of special mention would be the state of New Hampshire, where earned income and retirement income from sources including Social Security benefits and distributions from 401(k) plans, IRAs are not taxed. However, they do currently impose tax on income from dividends and interests, which may possibly also come from your pension. This tax is soon to be removed on 1st January 2027.

Other State Taxes That Factor Into Your Daily Bills 

The state and local taxes you pay vary from state to state. Besides the state income tax which we have looked at earlier, a few of the most common types of state taxes include sales tax, property tax, excise tax, and in particular significance during retirement – the estate and inheritance tax.

Sales Taxes

In some states, the sales tax is collected on both goods and services. This is typically computed at the final point of sales to the consumer. It is usually calculated as a fixed percentage of the bill amount and covers all goods and services. Since this tax is levied on all goods and services alike, the only way to reduce the amount of sales taxes paid, is basically to reduce spending.

While we agree that frugality is a good way of life, we do think that retirement is about enjoyment too to some extent. As such, we will be publishing tips on how to enjoy retirement while being able to not spend too much.  

Property Taxes

The property tax is a levied on real estate or personal property. It is computed as the fair market value of the property times an assessment ratio times the tax rate. It is an obligation of the owner of the property. Property values used for the assessment are determined by local officials, and the value used can be disputed by the property owners. The advantage to the taxing authority is that the revenue is more or less consistent every year, increasing with the property value. From the taxpayers end, they can minimize their property taxes by downsizing to staying in a property where it is just sufficient for a comfortable retirement.

Excise Taxes

Excise taxes are taxes on the manufacture, sale, or consumption of a product. These taxes are not based on value, but on quantity or use. Also, it doesn’t not apply to all goods, just specific goods. A tax on motor fuels, for example, is a type of excise tax. Another common item that attracts the excise tax is cigarettes. As such, knowing what types of goods attract the excise tax and avoiding having to consume them would be a good strategy to minimize excise taxes. 

Estate and Inheritance Taxes

An estate tax is a tax levied on the transfer of property at death. It is a tax on the transfer of property from one person to another. It is also known as inheritance, death, or estate tax and is usually paid when an individual passes on.

As passing on is often the end of one’s retirement, it would be important to consider the estate and inheritance tax of the state so as to ensure one’s legacy is able to be passed on to future generations. This is usually addressed as part of estate planning to ensure estate and inheritance taxes are minimized. 

In Conclusion

Retirement taxes can be a big expense for retirees. However, there are many states that have eliminated retirement taxes altogether. By living in one of these states with no tax on retirement income, you will save on both the upfront cost of retirement taxes and the ongoing cost of paying taxes on your retirement income.

If you are considering retiring in a state that has eliminated retirement taxes, there are a few things to keep in mind. First, it’s important to research the state’s exemption policies. Some states have more generous exemptions than others. Second, it’s important to understand how much tax you will actually pay when you retire. Different states use different methodologies to calculate the amount of tax that you will owe on your retirement income.

Last but not least, besides taxes on retirement income, states also impose other taxes which may inflate your day to day living expenses. As such it is important to be aware of the tax rates each of these states have. Of course, apart from just the financial aspects of one’s retirement, there are still other non financial factors to consider when choosing from one of the best states to retire in. We will talk more about it in the next post we make. 

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