If you are trying to decide where you are going to live after you retire one important thing to take into consideration is income tax. Choosing the right state to retire in can have a huge impact on your bottom line; likewise making the wrong choice can cost you thousands of dollars in taxes. You may not have much control over the federal income taxes you are paying but choosing the right state to live in can have a dramatic impact on the state income tax that you are paying in your retirement.

States with No Income Taxes at all on Retirement Income

There are a small number of states that have no state income tax at all. These states are Florida, Texas, Alaska, Wyoming, Washington, South Dakota and Nevada. Another two states, Tennessee and New Hampshire, only tax interest and dividend income over a certain amount, which would make a big difference for retirees living mostly on dividend or interest income.

Things can always change in these states, but many of these states require a constitutional amendment to impose new taxes, which would be rather difficult in this day and age especially with the voting power of retirees. Other states like Alaska have no income taxes because of the huge oil revenue that the state takes in.

Living in one of these states would save retirees a substantial amount of money each and every year, which would go a long way in raising your standard of living instead of giving this money to Uncle Sam to waist on unneeded government programs.

States with Special Retirement Tax Benefits

Other states have lower taxes on retirement or pension income as opposed to work related income. Some of these states include: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania exclude all federal, military and in-state government pensions from taxation. On the other hand there are states like Kansas, which taxes all public pensions from all other states.

Mississippi and Pennsylvania exempt all retirement income from state income taxes. This includes distributions from IRA accounts and 401(k) plans as well.  Several other states also offer special tax breaks which are based on age. For example New Jersey allows residents who are over 62 who’s income is less than $100k to exclude up to $20,000 of private pension income from their taxes. On the other hand New Jersey has some of the highest property taxes in the country but that’s for another article. The state of New York allows residents who are 59½ and older to exclude up to $20,000 of out-of-state public or private pensions or  from taxes, regardless of their total retirement income. Residents of Michigan are able to deduct up to $43,440 for single payers and $86,880 for married couples, of private pension income from state taxes in 2009.

States to Avoid Retiring to Due to High Taxes

Some states on the other hand have huge taxes on retirement income and it would be wise for retired persons to avoid settling in these states.

States with the highest retirement income taxes tax on 100% of most retirement income including pensions. What’s even worse is that their marginal tax brackets are at the higher end of the scale.  These states are Rhode Island (9.9% tax rate), California (9.55% tax rate on income less than $1 million) and Vermont (9.5% tax rate).

Nebraska and Connecticut also tax all retirement income, with top tax brackets of 6.84% and 5%, respectively. Not that great either, so I would think twice about moving to these states to retire as well.

Other Considerations

Retirement income taxes are obviously not the only consideration when looking for a good place to retire to. There are other things to look at such as property taxes and cost of living. New Jersey for example allows residents who are over 62 with income under $100k to exclude up to $20,000 of private pension income from their taxes. However, New Jersey has some of the highest property taxes in the country so retiring to that state is probably not the best of ideas.

You should definately give this a lot of thought and do your research before choosing which state you are going to spend your golden years in. The wrong choice can be a costly one.

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