When you’re planning your dream retirement, where you envision living out your golden years can be one of the most important factors to consider. Proximity to family is a priority for most people as are having access to good health care and social and cultural opportunities that interest you. One additional, but easy to overlook, consideration is taxes in your state of choice.
When you’re planning how to make your money last in retirement, the state you live in will play a key role.
“Each person’s circumstances will, of course, determine the best state for them to reside in,” says Brian Kelley, CPA, MST, managing director of state and local tax services at Sikich, a nationwide professional services firm. “But seeking out a place with a low tax burden is certainly worth looking into.”
Though Florida and Arizona remain popular choices, if you’re considering relocating, you may want to check out these less-discussed tax-friendly states for retirees.
Tax-friendly states for retirees to consider
“One of the top states to retire in from a tax-burden standpoint is actually Delaware, even though you don’t often hear about it as a state to consider,” Kelley says. “It has no sales tax, no estate tax and its property tax rates are on the low side. Even though it does impose a net income tax of 5.55 percent, it’s not on the high range and Social Security benefits are exempted.”
State sales and average local tax: 0 percent
State tax on Social Security: None
Effective property tax: 0.58 percent
Income tax rate: 5.55 percent
Many nature lovers are drawn to the Centennial State’s mountain views, but it also has many attractive tax advantages. The state’s property tax rate is the third lowest in the nation and it doesn’t impose any estate or inheritance taxes. “Its income tax is 4.55 percent, which is on the low side,” Kelley says.
Colorado voters approved a measure on the November 2020 ballot that reduced the state's flat income tax rate from 4.63 percent to 4.55 percent. The state also limits the how much its revenue can grow from year-to-year by lowering the tax rate if revenue growth is too high.
One watch-out: At just 2.9 percent, the state sales tax rate is low, but local governments can tack on as much as 8.3 percent.
State income tax range: 4.55 percent
Average combined state and local sales tax rate: 7.72%
Effective property tax: 0.49 percent
Estate tax or inheritance tax: None
If your retirement dream features more beaches than mountains, you may be surprised that Hawaii’s tax burden is not one of the highest in the United States. Although it does rank near the top in cost-of-living expenses, the state doesn’t tax Social Security benefits and it has a surprisingly low property tax rate.
“Hawaii’s individual income tax rate is not ridiculously high,” Kelley says. “If your annual income is below $300,000, you’ll be in the 7 to 8 percent tax bracket for the state of Hawaii. So depending on what your situation is the tax burden may not be a detriment for you to retire there.”
State sales and average local tax: 4.44 percent
State tax on Social Security: None
Effective property tax: 0.30 percent
Income tax rate: 8.25 percent
RELATED CONTENT: How much do I need for retirement? Our retirement planning guide can help you better understand the road to retirement — and how to craft a financial plan that’s built around your unique goals.
Follow-up steps before deciding
Make a trial visit
Whenever someone is planning on moving to another state, it’s a good idea to spend some time there before you make it permanent. “Make sure it’s a place that you can see yourself living in,” Kelley says.
Do some research
Kelley also notes that each state has a its own Department of Revenue website. “Most of these sites offer a wide breadth of general information from what the tax rates are to any key modifications they make to personal federal taxable income, so you can get an idea of what your tax impact would be,” he says. “If you’re eyeing a specific location within the state, visiting the local Chamber of Commerce’s website can also help you understand the local rules and activities in those communities.”
To avoid being taxed by two different states, you’ll need to take some key steps. “To establish a new primary residence involves cutting off ties to your old state, which includes your home as well as your driver’s license and any clubs or memberships,” Kelley says. “Otherwise, your old state can come back and look at the ties that you’re still maintaining and continue to consider you a resident — and continue to tax your income.”
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.