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The 15 Worst States for Retirement Taxes

Before you start making plans to relocate in retirement, it is important to consider the tax situation of any state on your list. Taxes are one of the biggest potential fiscal threats to those living on a fixed income, and some states impose significantly harsher taxes on retirees than others.

A recent ranking from Moneywise takes into consideration how much tax each state imposes on retirement income, any state-imposed estate or inheritance taxes and the Tax Foundation’s estimates for average state and local sales tax and the average, effective property tax.  The rankings also highlight some of the tax credits and exclusions seniors may qualify for.

Here are the 15 worst states when it comes to taxing retirees:


15. Massachusetts

Tax on retirement income: No taxes on Social Security benefits or government pension income, but most other retirement income is taxed at a flat rate of 5%.

State income tax: 5% flat rate.

Average property tax: 1.15% of home value.

Average state and local sales tax: 6.25%.

Estate tax: 0.8% to 16% on estates worth over $1 million.

Benefits: Residents over the age of 65 who earn less than a certain amount (for the 2020 tax year, that’s $61,000 for individuals and $92,000 for married couples who file jointly) are eligible for a property tax credit of up to $1,150.


14. Ohio

Tax on retirement income: No taxes on Social Security benefits, although income from most other retirement accounts is taxed as regular income.

State income tax: 0% to 4.797% (highest rate applies to incomes over $217,400).

Average property tax: 1.62% of home value.

Average state and local sales tax: 7.17%.

Estate tax: No estate or inheritance taxes.

Benefits: Seniors ages 65 or older can claim a retirement income credit of up to $200 per year on sources of income other than their Social Security, as well as a senior citizen tax credit of $50.


13. Maryland

Tax on retirement income: While Social Security benefits are not subject to state income tax, most other forms of retirement income are.

State income tax: 2% to 5.75% (highest rate applies to incomes over $250,000).

Average property tax: 1.04% of home value.

Average state and local sales tax: 6.00%.

Estate tax: 0.8% to 16% on estates valued at more than $5 million, and the inheritance tax is 10%, although property passed down to children, spouses and other blood relatives is exempt.

Other: Maryland is the only state in the country to charge both an estate tax and an inheritance tax. 

Benefits: Residents 65 or older may qualify for an exclusion of up to $31,100 on distributions from 401(k), 403(b) and 457 plans and income from public and private pensions.


12. Maine

Tax on retirement income: No taxes on Social Security benefits, and retirees can deduct up to $10,000 of eligible pension income.

State income tax: 5.80% to 7.15% (highest rate applying to incomes over $52,600).

Average property tax: 1.27% of home value.

Average state and local sales tax: 5.50%.

Estate tax: 8% to 12% on estates valued above $5.7 million.


11. California

Tax on retirement income: All but Social Security benefits are taxed.

State income tax: 1% to 13.30% (highest rate applies to incomes over $1,000,000).

Average property tax: 0.74% of home value.

Average state and local sales tax: 8.66%.

Estate tax: No.


10. New York

Tax on retirement income: Yes, but deductible up to $20,000.

State income tax: 4% to 8.82% (highest rate applies to incomes over $1,077,550).

Average property tax: 1.40% of home value.

Average state and local sales tax: 8.52%.

Estate tax: 5%-16% for estates worth more than $5.85 million.

Social Security benefits and military pensions are exempt from state taxes. Although retirees will be taxed on any retirement income over $20,000 from private retirement plans or out-of-state government plans.


9. Illinois

Tax on retirement income: No.

State income tax: 4.95% flat rate.

Average property tax: 2.05% of home value.

Average state and local sales tax: 9.08%.

Estate tax: 0.8% to 16% on estates above $4 million.

Illinois offers qualified seniors the option to freeze their home’s assessed value under the Senior Citizens Assessment Freeze Homestead Exemption and defer up to $5,000 of their property tax payments under the Senior Citizens Real Estate Tax Deferral Program.


8. New Jersey

Tax on retirement income: Yes, but minimal below $60,000.

State income tax: 1.40% to 10.75% (highest rate applies to incomes over $5 million).

Average property tax: 2.21%.

Average state and local sales tax: 6.60%.

Estate tax: No, but an inheritance tax of 11% to 16% is charged on inherited property worth $500 or more.

New Jersey provides some relief for retirees through its Senior Freeze program, which reimburses eligible seniors for property tax increases. In order to qualify, retirees need to be 65 or older, have been a resident of New Jersey for at least 10 years, have owned and lived in your current home for at least five years and earn less than a certain amount ($91,505 or less in 2019).

Social Security benefits are not taxed, and single taxpayers can exclude up to $75,000 of income from a retirement plan if their income is $100,000 or less. (Married seniors filing jointly can exclude up to $100,000.)


7. Rhode Island

Tax on retirement income: Yes.

State income tax: 3.75% to 5.99% (highest rate applies to incomes over $148,350).

Average property tax: 1.53% of home value.

Average state and local sales tax: 7.00%.

Estate tax: 0.8% to 16% on estates worth more than $1.6 million.

Other: All retirement income is fully taxable, including Social Security benefits, as long as it is also taxed federally.


6. Vermont

Tax on retirement income: 3.35% and 8.75%, including Social Security benefits.

State income tax: 3.35% to 8.75% (highest rate applies to incomes over $204,000).

Average property tax: 1.80% of home value.

Average state and local sales tax: 6.22%.

Estate tax: Flat 16% tax on estates exceeding $2.8 million.

Other: Some retired homeowners may qualify for Vermont’s Elderly and Permanently Disabled Tax Credit, which is worth 24% of the federal credit for elderly and permanently disabled individuals.


5. Minnesota

Tax on retirement income: Yes, on all forms of retirement income—including Social Security benefits—with the exception of military pensions.

State income tax: 5.35% to 9.85% (highest rate applies to incomes over $164,401).

Average property tax: 1.44%.

Average state and local sales tax: 7.46%.

Estate tax: 13%-16% on estates valued at more than $3 million, although assets left to a surviving spouse are exempt.


4. Wisconsin

Tax on retirement benefits: 3.86% to 7.65% on retirement income other than Social Security benefits and government pensions.

State income tax: 4% to 7.65% (highest rate applies to incomes over $263,480).

Average property tax: 1.73% of home value.

Average state and local sales tax: 5.46%.

Estate tax: No.


3. Kansas

Tax on retirement income: All Social Security income and in-state public pension income is exempt from state taxes for seniors earning an adjusted gross income of $75,000 or less. Military and federal government pensions are also exempt.

State income tax: 3.10% to 5.70% (highest rate applies to incomes over $30,000)

Average property tax: 1.33%.

Average state and local sales tax: 8.68%.

Estate tax: No.

Other: Income from private retirement plans like IRAs, 401(k)s or 403(b)s is fully taxed, and so is income from out-of-state public pensions.


2. Connecticut

Tax on retirement income: All types of retirement income are subject to Connecticut’s income tax, with a few exemptions.

State income tax: 3% to 6.99% (highest rate applies to incomes over $500,000).

Average property tax: 1.70% of home value.

Average state and local sales tax: 6.35%.

Estate tax: 7.2%-12% on estates valued at $5.1 million or more.

Other: Connecticut is the only state in the union that imposes its own gift tax that can reach rates as high as 12%.


1. Nebraska

Tax on retirement benefits: Yes.

State income tax: 2.46% to 6.84% (highest rate applies to incomes over $31,750).

Average property tax: 1.65% of home value.

Average state and local sales tax: 6.39%.

Estate tax: None, but Nebraska's inheritance tax ranges from 1% to 18%.

Nebraska not only taxes retirement income—including some Social Security benefits—but also imposes high property taxes.

Any Social Security income that is taxed federally will also get hit with Nebraska state income tax, while IRA withdrawals, 401(k) funds and pensions are all fully taxable.

While the inheritance tax for immediate relatives is only 1% on property valued at $40,000 or more, remote relatives will have to fork over 15% on anything worth over $15,000, and all other heirs are subject to the full 18% on anything valued at $10,000 or more.


Source research and rankings link:  https://moneywise.com/a/the-15-worst-states-for-retirement-taxes