Most tax-friendly states for retirees

Kiplinger

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These states impose the lowest taxes on retirees, according to Kiplinger's 2014 analysis of state taxes. All of them exempt Social Security benefits from state taxes. Most also exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)

This year, we also looked at states' capital gains tax rates because the six-year-long bull market has left many seniors with sizable gains in their taxable portfolios. Unlike the federal government, which applies lower rates to long-term gains (the profit from the sale of assets owned over one year), most states tax both short- and long-term gains at ordinary income tax rates. That adds to the appeal of states with no income tax, which are attractive to seniors with sizable nest eggs. They can take profits without having to worry about a big state tax bill (although they may still have to fork over federal taxes). Adding the state tax on profits to our criteria leads us to drop otherwise retiree-friendly South Carolina from our top ten list. Its top income tax rate of 7% kicks in once income exceeds $14,400. South Dakota, which has no income tax, takes its place on our list of the most tax-friendly states for retirees. Nevada, another no-income-tax state that also has relatively low property taxes, moves up to No. 3 on our list.

Before packing your bags and moving to a state with no income tax, though, pay attention to the trade-offs. Some states with no income tax impose above-average sales taxes or tax a broader array of goods and services. Property taxes may be higher, too.

See Also: The 10 Worst States for Taxes on Retirees

#1 Alaska

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Kennecott, AK | Courtesy Henry via Wikimedia Commons

State Income Tax: None
State Sales Tax: None
Estate Tax/Inheritance Tax: No/No

The Last Frontier is a tax paradise for retirees who don't mind long, dark winters and bears in their backyards. The clincher: The state sends all permanent residents an annual dividend check from the state's oil wealth savings account. The 2014 payout will be $1,884 per person, state officials just announced.

The median property tax on the state's median home value of $232,900 is $2,422, according to the Tax Foundation, a nonprofit organization in Washington, D.C. But homeowners 65 and older, or surviving spouses 60 and older, are exempt from municipal taxes on the first $150,000 of the assessed value of their property.

While Alaska doesn't have a sales tax, 104 municipalities impose local sales taxes of up to 7%. The statewide average is 1.69%, according to the Tax Foundation.

#2 Wyoming

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MedicineWheel | Courtesy U.S. Forest Service via Wikimedia Commons

State Income Tax: None
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

The Equality State is tax-friendly to all residents, especially retirees. Thanks to abundant state revenues from oil and mineral rights, the average state and local combined tax rate for all residents is 6.89%, the lowest in the U.S., according to the Tax Foundation.

Median property taxes are low for a home on the range -- $1,058 on a $184,000 median-valued home. Even better for seniors, those who meet income requirements are eligible for a refund of up to $900 ($800 for single filers) of property taxes, utilities and sales/use taxes. The state sales tax is low as well.

See Also: 9 Surprising Things You Didn't Know Were Taxable

#3 Nevada

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Fort Churchill | Courtesy Kelapstick via Wikimedia Commons

State Income Tax: None
State Sales Tax: 6.85%
Estate Tax/Inheritance Tax: No/No

The Silver State offers retirees a jackpot of tax savings. Again, there's no state income tax. Food and prescription drugs are exempt from the state's 6.85% sales tax, but counties may add up to an additional 1.25%.

All property in the state is subject to tax by the state, counties, cities, towns and school districts. The median property tax on a $207,600 median-valued home is $1,749, according to the Tax Foundation. That's relatively low. There are no property tax breaks for seniors, however.

See Also: 10 Weird Ways States Tax You (and Don't)

#4 Georgia

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Andersonville Monuments | Courtesy Jud McCranie via Wikimedia Commons

State Income Tax: 1% to 6%
State Sales Tax: 4%
Estate Tax/Inheritance Tax: No/No

Retirees looking for tax relief may want to take a midnight train to the Peach State. Social Security income is exempt from state taxes, and so is up to $35,000 of most types of retirement income for residents age 62 to 64. For those 65 and older, the exemption is $65,000 (or $130,000 per couple).

Retirement income includes income from pensions and annuities, interest income, dividend income, net income from rental property, capital gains income, and the first $4,000 of earned income, such as wages.

The statewide sales tax is low (food and prescription drugs are exempt), but jurisdictions can add up to an additional 4% of their own taxes.

A Georgia homeowner may pay a combination of county, city, school and state taxes, depending on location. The median property tax on a $162,800 median-valued home is a low $1,346, according to the Tax Foundation. Plus individuals age 65 and older are eligible for an exemption from all state property taxes on their home and up to ten acres of land. The state property tax is being phased out by 2016.

More from Kiplinger: 10 States with the Scariest Death Taxes

#5 Arizona

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Canyon de Chelly | Courtesy Hydrargyrum via Wikimedia Commons

State Income Tax: 2.59% to 4.54%
State Sales Tax: 5.6%
Estate Tax/Inheritance Tax: No/No

The Grand Canyon State has an income tax, although it is relatively low compared with other states. But Social Security benefits are exempt, as is up to $2,500 of some other retirement income. The state's top income tax rate doesn't kick in until income hits $150,000 ($300,000 for married couples).

Tax jurisdictions set property tax rates, which vary considerably from one area to another. On average, though, Arizona has some of the lowest property taxes in the U.S., according to the Tax Foundation. The median property tax on a $187,700 median-valued home is $1,356, according to the Tax Foundation.

One note of caution: Arizona's statewide sales tax of 5.6% can climb to 12% when combined with local sales taxes. But food for home consumption and prescription drugs are exempt from the state sales tax.

See the Full List: 10 Most Tax-Friendly States for Retirees

 

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