Seniors who want to hold onto more of their retirement income often consider relocating to a state that doesn’t tax Social Security or pensions. It’s a smart move. As of 2022, there are 14 states that don’t tax pensions and 38 states that don’t tax Social Security benefits.
Paying less in taxes can reduce strain on a retiree’s budget and help their money last longer. That becomes especially important when inflation shrinks purchasing power. Here’s a closer look at the states that don’t tax pensions and Social Security.
How Much Can State Taxes Take Out of Retirement Income?
Each state taxes income, including retirement income, differently. How much of a bite taxes take out of retirement income can depend on the applicable tax rate and tax brackets where you live.
As of 2022, 43 states tax individual income. Forty-one states levy taxes on wage and salary income, while seven states do not assess individual income tax. The state of New Hampshire exclusively taxes dividend and interest income, while Washington taxes capital gains for certain high income individuals.
In some states, the same tax rate applies to all taxable income. Other states use a graduated tax system with individual tax brackets, similar to the way the federal tax system works.
California has the highest marginal tax rate, at 13.30%. Other states with double-digit tax rates include Hawaii (11%), New York (10.90%), New Jersey (10.75%), and Washington, D.C. (10.75%). Aside from the states that have no income tax, the lowest marginal tax rate belongs to North Dakota, which has an income tax rate of 2.90%.
Are There States That Don’t Tax Pensions?
Altogether, there are 14 states that don’t tax federal or private pensions. Some of these are states that have no income tax at all; others have provisions in state law that exclude pension income from being subject to income tax.
|State||Pension Tax Policy|
|Alabama||Pension income excluded from state income tax|
|Alaska||No state income tax|
|Florida||No state income tax|
|Hawaii||Pension income excluded from state tax|
|Illinois||Pension income excluded from state tax|
|Mississippi||Pension income excluded from state tax|
|Nevada||No state income tax|
|New Hampshire||Only taxes interest and dividend income|
|Pennsylvania||Pension income excluded from state tax|
|South Dakota||No state income tax|
|Tennessee||No state income tax|
|Texas||No state income tax|
|Washington||Only taxes capital gains for high income earners|
|Wyoming||No state income tax|
Keep in mind that state or local government employee pension benefits may be treated differently. New York, for example, specifically excludes pension benefits paid by state or local government agencies from state income tax. If you move to another state, however, that state could tax your New York pension benefits.
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Are There States That Don’t Tax Social Security?
Ironically, there’s a lot of insecurity surrounding this government assistance program, including the question of if and when Social Security will run out. Another big one: How will taxes affect your benefit amount? The good news is that 37 states and the District of Columbia do not tax Social Security retirement benefits. Similar to the states that don’t tax pensions, these states either have no income tax at all, offer exemptions, or have elected to exclude Social Security benefits from taxable income calculations.
|State||Social Security Tax Policy||State||Social Security Tax Policy|
|Alabama||Not included in income tax calculations||Nevada||No state income tax|
|Alaska||No state income tax||New Hampshire||Only taxes interest and dividend income|
|Arizona||Not included in income tax calculations||New Jersey||Not included in income tax calculations|
|Arkansas||Not included in income tax calculations||New York||Not included in income tax calculations|
|California||Not included in income tax calculations||North Carolina||Not included in income tax calculations|
|Delaware||Not included in income tax calculations||North Dakota||Exempt from taxation|
|Florida||No state income tax||Ohio||Not included in income tax calculations|
|Georgia||Not included in income tax calculations||Oklahoma||Not included in income tax calculations|
|Hawaii||Not included in income tax calculations||Oregon||Not included in income tax calculations|
|Idaho||Not included in income tax calculations||Pennsylvania||Not included in income tax calculations|
|Illinois||Not included in income tax calculations||South Carolina||Not included in income tax calculations|
|Indiana||Not included in income tax calculations||South Dakota||No state income tax|
|Iowa||Not included in income tax calculations||Tennessee||No state income tax|
|Kentucky||Not included in income tax calculations||Texas||No state income tax|
|Louisiana||Not included in income tax calculations||Virginia||Not included in income tax calculations|
|Maine||Not included in income tax calculations||Washington||Only taxes capital gains for high-income earners|
|Maryland||Not included in income tax calculations||Washington, D.C.||Not included in income tax calculations|
|Massachusetts||Not included in income tax calculations||Wisconsin||Not included in income tax calculations|
|Mississippi||Not included in income tax calculations||Wyoming||No state income tax|
Montana and New Mexico do tax Social Security benefits, but with modifications.
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Which States Don’t Tax Capital Gains?
Federal capital gains tax applies when an investment or asset is sold for more than its original purchase price. The short-term capital gains tax rate applies to investments held for less than one year. Investments held for longer than one year are subject to the long-term capital gains tax.
States can also tax capital gains, though not all of them do. The states that do not tax capital gains are the same states that do not have income tax or have special tax rules on which income is taxable. They include:
• New Hampshire
• South Dakota
As far as how much capital gains are taxed at the state level, the tax rate you’ll pay can depend on where you live. Some states offer more favorable tax treatment than others for capital gains.
Which States Don’t Tax Income?
Seven states don’t levy any type of state income tax. Once again, those states are:
• South Dakota
As mentioned, New Hampshire and Washington state only tax certain types of income. That means if you live in these states, your Social Security benefits and pension benefits can go further when it comes to covering your retirement expenses.
Can You Have Dual State Residency?
Generally, most people are residents of just one state. It is possible, however, to have dual residency in two different locations. This can happen if you live in each state for part of the year to attend school or to work.
For example, the state of Virginia distinguishes between residents who maintain a home in the state for 183 days or more during the year and domiciliary residents who claim Virginia as their legal state of residence. Under state law, it’s possible to be a resident of Virginia and a domiciliary resident of another state. For instance, a college student from California who lives in Virginia during the school year would be a dual resident. However, you can have only one domicile – in this example, California.
If you live and earn taxable income in two different states during the year, you may have to file tax returns in both those states unless a reciprocity agreement exists. Reciprocity agreements protect taxpayers who work in states other than the one in which they’re legal residents from being hit with double taxation.
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What to Consider Before Moving to a Tax-Friendly State
Moving to a state that doesn’t tax pensions and Social Security could yield income tax savings, but it’s important to consider the bigger financial picture. Paying no income taxes on retirement benefits may not be much of a bargain if you’re stuck paying higher property taxes or your heirs are left with steep inheritance taxes, for instance.
Also, consider the overall cost of living. If everyday essentials such as housing, food, and gas are higher in a state that has no income tax, then your retirement benefits may have less purchasing power overall. If costs end up being higher than you anticipated, you might end up working after retirement to fill any retirement income shortfalls.
Tax planning is an essential part of retirement planning, since it’s to your advantage to minimize taxes wherever possible. Moving to a state that doesn’t tax Social Security or pension benefits can make sense if those types of retirement income feature heavily in your plans.
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What is the most tax-friendly state to retire in?
The most tax-friendly states for retirees are states that don’t tax pensions and Social Security, and have a low tax-profile overall for sales and property tax. Some of the best states for retirees who want to avoid high taxes include Alabama, the District of Columbia, Nevada, and Tennessee.
What states have no 401(k) tax?
States that do not tax 401(k) distributions are generally the same states that don’t tax income. Those states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire and Washington don’t tax 401(k) distributions either.
Which states do not tax pensions?
States that do not tax pensions include the seven states that have no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — as well as New Hampshire and Washington. Additionally, five states — Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania — exclude pension income from state taxation.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.