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5 Tax-Friendly States for Retirees 2011

by Mary Beth Franklin Friday, July 1, 2011
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Where's the best state for you to retire? Here's a good place to start your search: These five impose the lowest taxes on retirees in the contiguous U.S., according to our research. All these retiree tax heavens exempt Social Security benefits from state income taxes. Many of them exclude government and military pensions from income taxes, too, or offer blanket exclusions up to a specific dollar amount for a wide variety of retirement income. Although relocating to an income-tax-free state such as Florida or Texas may sound appealing, sometimes the best retirement destination is a state that imposes an income tax but offers generous exemptions for retirement income. More from Kiplinger.com: Compare All States with Kiplinger's Tax Retiree Map
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6 Great Jobs for Retirees Once you narrow your search to a few key states, zero in on local taxes. Municipalities can impose 8 Great Places to Retire hefty property taxes or other assessments, or Abroad they may layer local sales taxes on top of statewide levies. Federal taxes? If you claim the standard deduction, they'll be the same no matter where you live. But if you itemize your deductions, you'll be able to write off real estate taxes and state income taxes, reducing your federal tax bill and easing some of the pain.

#1 Wyoming
State Income Tax: None State Sales Tax: 4% Estate Tax/Inheritance Tax: No/No Thanks to the abundant revenues that Wyoming collects from oil and mineral companies, its residents have one of the lowest tax burdens in the nation, according to the Tax Foundation, a nonprofit research group in Washington, D.C. There is no state income tax. The state sales tax is 4%, and counties in the Equality State can only add up to 1% in additional levies -- a very low ceiling. Plus, prescription drugs and groceries are exempt from state sales taxes. For most property, only 9.5% of market value is subject to tax, so a home worth $100,000 is taxed on $9,500 of assessed value.

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#2 Mississippi
State Income Tax: 3%-5% State Sales Tax: 7% Estate Tax/Inheritance Tax: No/No Mississippi offers a sweet income-tax deal for retirees. It not only exempts Social Security benefits from state income taxes but also excludes all qualified retirement income -- including pensions, annuities, and IRA and 401(k) distributions. Remaining income is taxed at a maximum 5%. In addition, the Magnolia State is home to some of the lowest property taxes in the nation. Residential property is taxed at 10% of assessed value, and seniors qualify for a homestead exemption on the first $75,000 of value. The statewide sales tax is 7%, and counties and cities may add up to 3% to the state rate. But prescription drugs and health care services are exempt.
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#3 Pennsylvania
State Income Tax: Flat rate of 3.07% State Sales Tax: 6% Estate Tax/Inheritance Tax: Yes/Yes True to its Quaker roots, Pennsylvania extends a friendly hand to retirees. It offers unusually generous exclusions from state income tax on a wide variety of retirement income. Pennsylvania does not tax Social Security benefits or any type of public or private pensions. Nor does it nick distributions from 401(k)s, IRAs, deferredcompensation plans or other retirement accounts. Remaining income is taxed at a low, flat rate of 3.07%. Food, clothing and medicine are exempt from state sales taxes. Property taxes can be high in the Keystone State, especially near larger cities, but rates vary widely. One caveat for the wealthy: Your heirs wont get off so easily. Pennsylvania is one of the few states to have both an inheritance tax, paid by the heirs, and an estate tax -- though it applies only when an estate is large enough to trigger federal estate taxes ($5 million or more).

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#4 Kentucky
State Income Tax: 2%-6% State Sales Tax: 6% Estate Tax/Inheritance Tax: No/Yes
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The home of the Kentucky Derby is a good bet for retirees. It exempts Social Security benefits from state income taxes, and it allows residents to exclude up to $41,110 per person in retirement income from a wide variety of sources, including public and private pensions and annuities. Personal income-tax rates range from 2% to 6%. A 6% sales tax is imposed at the state level only. Homeowners 65 and older qualify for a homestead provision that exempts part of the value of their property from state taxes. The Bluegrass State has an inheritance tax, but immediate family members are exempt.

#5 Alabama
State Income Tax: 2%-5% State Sales Tax: 4% Estate Tax/Inheritance Tax: No/No Alabama is a tax haven for retirees. Social Security benefits, as well as military, public and private defined-benefit pensions, are excluded from state income taxes. Remaining income is taxed at the state's low rates, which range from 2% to 5%. Alabama also has some of the lowest property taxes in the U.S. Homeowners 65 and older are exempt from state property taxes, but some cities assess their own property tax. The only downside is sales taxes. Although the statewide rate is just 4%, cities and counties in the Yellowhammer State can impose their own levies, and together the taxes can add up to a whopping 10% or more in some cities. Food is taxed, but prescription drugs are not. Visit Kiplinger for more tax-friendly states for retirees. ___ Popular Stories on Yahoo!: 5 Diet Rules It's Okay to Break Money Tips From Self-Made Millionaires Paying the Bills by Juggling Jobs Copyrighted, Kiplinger Washington Editors, Inc. Follow Yahoo! Finance on Twitter; become a fan on Facebook. Show: Newest First
Post a comment Comments 1 - 10 of 2309 First Prev Next Last

2,309 comments

Bill And T 45 seconds ago Report Abuse

I'm just going to stay in FL.

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J 49 seconds ago Report Abuse

I notice that most commentary about "tax-friendly states" refers favorably to the ability pay minimal taxes or, even better, no taxes. These articles take the point of view of corporations, of retirees or of other interest groups. Such a narrow and partial view inevitably cultivates resentment: someone is paying taxes and paying a higher rate of taxes because others are paying less. So, its not so accurate to call the state tax friendly; rather, the tax code favors some while weighing heavily on others. It might make more sense to consider a "tax friendly state" one which taxes equitably, and gives tax payers the best return on their taxes while not tolerating waste or unwarranted government growth. We see in some European societies that the tax base has eroded dangerously because lower and middle class citizens see the very wealthy avoiding their share of taxes. Many common people feel alienated and abused. They are asked to bear the brunt of the austerity which will bring the economy back in line. In the States, if a retiree single-mindedly seeks to pay the least taxes, that has an undermining effect on safe communities, schools, policing, parks, libraries and a competent work-force serving the needs of seniors. Do seniors express satisfaction with lower taxes buying lower levels of services? No. I hear complaints about bad service, bumpy roads, our declining place in the world in science, education, transportation, and food safety. "No such thing as a free lunch" has often been heard but seldom addressed to the well-to-do. Now some of the more well-to-do may need to be reminded that their wealth flows from other peoples' labor, that good fortune is not an entitlement nor always a sign of having won divine endorsement. May we make it our shared mission to provide and sustain well-being for all.
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Jane X 1 minute ago Report Abuse

My best friend ,she just has announced her wedding with a millionaire young man Ronald who is the CEO of a MNC !they met via ---------ich'Friends.rg--- ..it is the largest and best club for wealthy people and their admirers to chat online. you dont have to be rich there ,but you can meet one ,maybe you wanna check it out or tell your friends ! IMMENSLY and since i know how ultra-patriotic y'all are, it's very partriotic to pay taxes.... just sayin america.... you have heard the voice of reason! -------Reply

Sunday 1 minute ago Report Abuse

@God's Country; Reading your comments has re-inforced my belief that despite this country's greatness, it is still filled with un-intelligent people. TIME magazine recently wrote an article that essentially states that AMerican hate those who are atrying to better their lot. Why don't you and your likes go and re-incanate Ronald Reagan so that more poverty will become the norm in America. After he dies the second time, bring back G W Bush. Keep whining about 'Obama this, Obama that'. Illiterate.
Reply

Jane X 1 minute ago Report Abuse

My best friend ,she just has announced her wedding with a millionaire young man Ronald who is the CEO of a MNC !they met via ---------ich'Friends.rg--- ..it is the largest and best club for wealthy people and their admirers to chat online. you dont have to be rich there ,but you can meet one ,maybe you wanna check it out or tell your friends ! It amazes and saddens me how few comments actually had anything to do with retirement. What a mess. -------Reply

Dale 1 minute ago Report Abuse

Everybody wants to bash the wealthy and cry foul when they present their side of the argument but if the shoe were on the other foot they would be the same way. If you earned it, you have a right to do as you please with it, if you want it - work for it. The American Dream is about the opportunity not the right to succeed. This country is full of lazy, materialistic, ignorant and government dependent people who will spend more time arguing their right to handouts as opposed to working for what they want. Disabilities come in all shapes and sizes, some can be dealt with and still succeed others cannot. The problem is our system and the abuse which takes away from those who truly do need help. Disability and Social Security were never meant to be combined and surely were never meant to be a sole source of income. Too many priveldeges are now treated as rights and enforced by the judicial system. The rest of the world is passing us by in so many areas but we can't see passed our own selfish greed, no matter which social-economic class you're in, to notice until it will all be too late.
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Bri J 2 minutes ago Report Abuse

all of these states have awful weather, I wouldn't want to deal with it as a senior
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Crafashion.Com 2 minutes ago Report Abuse

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A Yahoo! User 2 minutes ago Report Abuse

The most important vote in our history is 16 months away. I hope only voters with a IQ above 45 is allowed to vote.
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DavidR 2 minutes ago Report Abuse

Wow, 4 of the 5 are not liberal havens. Guess if you're a hardcore liberal, you like high taxes because the government provides so much for you.
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