The Best States for Retirement & Taxes

State Income Taxes

Seven states do not levy state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. However, in tough economic times, states without an income tax are more likely to raise other taxes or fees in order to offset the shortfall in their budgets.

Many states with income tax offer retirees generous tax breaks that may be more beneficial than relocating to an income tax-free state.

Taxes on Pensions

Though many states offer tax exemptions on retirement income, private and public pensions may be handled differently. Ten states—Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania—do not tax any federal, state and local pension income. However, private pension plans or out-of-state pension plans may be taxed.

California, Connecticut, Nebraska, Rhode Island and Vermont tax all retirement income.

New Jersey, New York and Michigan base their taxation on age and income.

Taxes on Social Security

In the past, states taxed up to 85 percent of Social Security. Now, the District of Columbia and 27 states no longer tax Social Security.

Minnesota, Nebraska, North Dakota, Rhode Island, Vermont and West Virginia tax social security income that is subject to federal taxation.

Sales Taxes

Sales taxes vary greatly from state to state. It is important to take state and local sales taxes into consideration when evaluating whether a state is tax-friendly or not. Currently there are five states that do not collect state sales tax--Alaska, Delaware, Montana, New Hampshire and Oregon. California has the highest sales tax with Indiana, Mississippi, New Jersey, Rhode Island and Tennessee running a close second.

Many cities assess their own sales tax. So in Chicago, you will be paying a combined sales tax of 10.25 percent.

Property Taxes

Sometimes retirees with fixed incomes end up with property taxes higher than they can pay. The Retirement Living Information Center reports, "Property tax reform that takes into account a homeowner's ability to pay, such as a so-called 'property tax circuit breaker,' can better protect low-income homeowners from rising property taxes that accompany rising property values." There are 31 states and the District of Columbia that currently offer property tax circuit breakers.

Best and Worst Taxation States

Kiplinger.com lists the top tax-friendly states to be Delaware, Alaska, Kentucky, South Carolina, New York, Michigan, Wyoming, Nevada and Colorado.

The least tax-friendly states are Pennsylvania, New Jersey, Wisconsin, Vermont, Maryland, New Hampshire, Arkansas, Maine, Rhode Island and North Dakota.