Beware these 15 worst states for taxes on your retirement

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Beware these 15 worst states for taxes on your retirement
Beware these 15 worst states for taxes on your retirement

Maybe you want to spend your retirement somewhere sunny. Or maybe a view of the mountains is more your style.

But before you start making plans, it’s worth looking at the tax situation in any state you’re considering. Some places impose significantly harsher taxes on retirees than others.

Our rankings take 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 taxes and the average, effective property tax. We also highlight some of the tax credits and exclusions seniors may qualify for.

An expert can help you look at your options. Certified financial planners who are “fiduciaries” have strategies just for retirees — and they’re bound by law to put your interests first.

Here are the 15 worst states when it comes to taxing retirees, counting down to the state where seniors face the worst tax burdens.

15. Massachusetts

Massachusetts
Matthew Botelho / Shutterstock
  • Tax on retirement income: Yes

  • State income tax: 5% flat rate

  • Average property tax: 1.15% of home value

  • Average state and local sales tax: 6.25%

Massachusetts does not tax Social Security benefits or government pension income, but most other retirement income is taxed at a flat rate of 5%.

The Bay State has the 18th-highest average property tax rate in the country, with owners of a $350,000 house paying roughly $4,025 in tax per year.

Fortunately, 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.

Massachusetts also has an estate tax — a tax on the fair market value of your assets after you die — ranging from 0.8% to 16% on estates worth over $1 million. This $1 million threshold is tied with Oregon’s for the lowest in the country.

14. Ohio

Ohio
f11photo / Shutterstock
  • Tax on retirement income: Yes

  • 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%

The Buckeye State does not tax Social Security benefits, although income from most other retirement accounts is taxed as regular income.

Seniors aged 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.

Ohio’s property taxes are the ninth-highest in the country, but seniors who earn less than a certain amount ($33,600 during the 2020 tax year) may qualify for the homestead exemption, which exempts up to $25,000 of their home’s market value fromlocal property taxes.

Calculate how much more you need to save each month to reach your retirement nest egg goal.

13. Maryland

Maryland
Hunter Herrman / Shutterstock
  • Tax on retirement income: Yes

  • 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%

Although Maryland is known as the Free State, don’t expect much in the way of freebies if you’re planning to retire there. While Social Security benefits are not subject to state income tax, most other forms of retirement income are.

On the bright side, 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.

In addition to a state income tax of 2% to 5.75%, Maryland’s 23 counties and Baltimore City also levy local income taxes ranging between 2.5% and 3.2% of residents’ taxable income.

Property taxes in Maryland also are fairly high, with the owner of a $350,000 home paying around $3,640 a year. Maryland also is the only state in the country to charge both an estate tax and an inheritance tax: Estates are taxed, and so are the heirs who receive a deceased person’s assets.

12. Maine

Maine
Arlene Waller / Shutterstock
  • Tax on retirement income: Yes

  • 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%

Retiring in the Pine Tree State is not all bad: Maine doesn’t tax Social Security benefits, and retirees can deduct up to $10,000 of eligible pension income.

However, all other forms of retirement income are subject to state income tax rates as high as 7.15%, with the highest rate applying to anyone with an income of more than $52,600.

Maine’s property taxes are also pricey, plus Maine charges an estate tax ranging from 8% to 12% on estates valued above $5.7 million. Fortunately, the sales tax in the state is lower than average, and Maine does not allow cities or towns to impose any local sales tax.

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11. California

California
Lucky-photographer / Shutterstock
  • Tax on retirement income: Yes

  • 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%

Let’s start with some good news: If you’re planning to retire in the Golden State, your Social Security benefits are exempt from state income taxes.

Unfortunately, all of your other retirement income is fully taxable, and at the highest tax rate in the country if you earn more than $1 million a year. (If that’s the case, well done.)

Another bright spot for retirees is that the average property tax rate in California is quite low; on a home worth $350,000 you’ll only pay around $2,590. However, it’s worth noting that California has the highest state sales tax in the country at 7.25%, and the cost of living is 18% higher than the national average.

If you need a bit of help navigating California’s complex tax rules, work online with a certified financial planner who can tailor you a tax-light retirement plan.

10. New York

New York
Ingus Kruklitis / Shutterstock
  • 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%

Social Security benefits and military pensions are exempt from state taxes in New York. But the Empire State has the 14th highest property tax rate in the country, with the average taxes on a $350,000 house costing around $4,900.

The good news is that tax breaks are available for seniors at the local level. Local governments and school districts have the option to reduce the assessed value of a senior’s home by up to 50%, depending on the senior’s income.

Some seniors may also qualify for a School Tax Relief (STAR) exemption, in which the first $66,800 of their home value is exempt from school property taxes. In order to be eligible, you’ll need to be at least 65 years of age and have had an annual household income below a certain threshold ($86,300 or less during the 2019-2020 school year).

In addition to property taxes, retired New Yorkers also have to consider the combined state and local sales tax, which is the 10th highest in the country, as well as an estate tax of 3.06% to 16% on estates worth $5.9 million or more.

9. Illinois

Illinois
f11photo / Shutterstock
  • 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%

Retirees planning to settle down in the Land of Lincoln had better start saving their pennies (or start taking photos of their grocery receipts), because Illinois has the second-highest average property tax rate in the country.

An owner of a $350,000 house pays roughly $7,175 a year in property taxes, although some seniors in Illinois may qualify for a homestead exemption of up to $8,000, depending on which part of the state they live in.

Aside from the high property taxes, Illinois residents are also subject to the sixth-highest combined state and local sales tax in the U.S., as well as an estate tax ranging from 0.8% to 16% on estates above $4 million.

On the bright side, the state’s flat 4.95% income tax rate is quite low, and income from most retirement plans — including Social Security benefits — is exempt from state taxes.

8. New Jersey

New Jersey
Mia2you / Shutterstock
  • 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%

For retirees in the Garden State, property taxes are the biggest weed in the flower bed. New Jersey has the highest average property tax rate in the country: The owner of a $350,000 home has to shell out around $7,735 each year.

New Jersey provides some relief for retirees through its Senior Freeze program, which reimburses eligible seniors for property tax increases. Additionally, senior citizens with an annual household income of $10,000 or less qualify for a property tax deduction of $250.

Most Americans can cushion the blow from high property taxes by cutting costs on their home insurance — many people overpay by $1,100.

Social Security benefits are not taxed in New Jersey, but while the state eliminated its estate tax in 2018, it still charges an inheritance tax of 11% to 16% on inherited property worth $500 or more.

7. Rhode Island

Rhode Island
Michael Sean OLeary / Shutterstock
  • 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%

Rhode Island may offer scenic views of the Atlantic, but you can expect to be hit with a tidal wave of taxation if you decide to retire in the Ocean State. All retirement income is fully taxable, including Social Security benefits, as long as it is also taxed federally.

However, residents earning a certain amount or less ($85,150 for individuals and $106,400 for joint filers in 2019) are exempt from paying state tax on their Social Security benefits.

Property taxes in Rhode Island are the 10th highest in the country, although homeowners 65 or older whose income is $30,000 or less are eligible for a state tax credit. And if you’re still carrying a mortgage, you could be due for a money-saving refinance.

Rhode Island also has an estate tax ranging from 0.8% to 16% on estates worth more than $1.6 million, making it one of only a few states that tax estates valued at under $2 million.

6. Vermont

Vermont
Songquan Deng / Shutterstock
  • Tax on retirement income: Yes

  • 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%

If you retire in Vermont, the government will tap your income just like one of the state’s maple trees. The Green Mountain State taxes all forms of retirement income at rates between 3.35% and 8.75%, and that includes Social Security benefits.

However, individuals who earn an adjusted gross income of $45,000 or less, and joint-filing couples who earn $60,000 or less, are eligible for full exemptions from state Social Security tax.

Vermont also charges a flat 16% estate tax on any estate that exceeds $2.8 million in value. And, property taxes are quite pricey, with the average tax on a $350,000 house coming to around $6,300.

Fortunately, 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

Minnesota
Mitch Boeck / Shutterstock
  • Tax on retirement income: Yes

  • 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%

Minnesota taxes all forms of retirement income — including Social Security benefits — with the exception of military pensions.

However, thanks to the North Star State’s progressive tax system, households earning less than $23,900 are exempt from paying state taxes on their Social Security benefits. The state also offers a special income tax deduction for seniors who make $61,080 or less, or $78,180 or less for couples who file jointly.

Property taxes in Minnesota are the 13th highest in the country, with owners of a $350,000 home paying around $5,040 a year.

The state’s residents also are subject to an estate tax of 13% to 16% on estates valued at more than $3 million, although assets left to a surviving spouse are exempt.

4. Wisconsin

Wisconsin
MarynaG / Shutterstock
  • Tax on retirement benefits: Yes

  • 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%

Although all Social Security benefits and income from government pensions are exempt from state taxes in Wisconsin, any other retirement income is fully taxable at rates ranging from 3.86% to 7.65%.

As a small concession, retirees who are 65 or older and have an adjusted gross income of less than $15,000 — or $30,000 for married couples filing jointly — can deduct up to $5,000 of their retirement income from their state taxes.

The Badger State does not have any estate or inheritance taxes, but property taxes are quite steep — the fifth highest in the country. The average property tax on a house valued at $350,000 is $6,055, and there are no special exemptions available for low-income seniors.

The state is much less punishing at the cash register. Wisconsin has one of the lowest combined state and local sales tax rates in the country. Wisconsin residents can save even more when they shop by saving pictures of their receipts to earn cash-back rewards.

3. Kansas

Kansas
Ricardo Reitmeyer / Shutterstock
  • Tax on retirement benefits: Yes

  • 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%

A ray of sunshine for anyone hoping to retire in the Sunflower State is that 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.

Unfortunately, income from private retirement plans like IRAs and 401(k)s is fully taxed, and so is income from out-of-state public pensions. Kansas also has the eighth-highest average state and local sales tax, which means that shopping for essentials can be pricey.

The state’s property taxes are on the expensive side, with the average tax on a $350,000 home coming to $4,655. However, the state offers property tax relief for low-income seniors in the form of a refund for up to 75% of property taxes paid.

If you’re looking to push extra savings into your retirement fund, there are several ways you can boost your monthly earnings.

2. Connecticut

Connecticut
Allan Wood Photography / Shutterstock
  • Tax on retirement income: Yes

  • 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%

Anyone planning to commit to the Constitution State will have to contend with some serious taxes on their income. All types of retirement income are subject to Connecticut’s income tax, although there are a few exemptions.

Retired Connecticuters with a federal adjusted gross income of $75,000 or more — $100,000 for joint filers — will have 25% of any Social Security benefits that are taxed at the federal level taxed by the state as well.

The Nutmeg State currently has the seventh-highest property tax rate in the country, though the state gives property tax credits to lower-income seniors.

Connecticut imposes an estate tax of between 7.2% and 12% on estates valued at $5.1 million or more. It’s also the only state in the union that imposes its own gift tax — a tax on assets you give away while you’re still alive — that can reach rates as high as 12%.

1. Nebraska

Field of green corn and blue sky with white clouds. Rural landscape with corn stalks and country road
Oleg Elkov / Shutterstock
  • 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%

The prize for the least tax-friendly state for retirees goes to Nebraska, which 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.

Residents of the Cornhusker State are also subject to an inheritance tax that ranges from 1% to 18%. 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.

And if all that weren’t enough of a financial burden, Nebraska also has the eighth-highest property taxes in the country. On a home valued at $350,000, the average property tax would be $5,775.



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