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15 Worst States for Taxes on Retirees

Sandra Block, Senior Associate Editor, <i>Kiplinger's Personal Finance</i>
15 Worst States for Taxes on Retirees

Retirees have special concerns when evaluating state tax policies: Are Social Security benefits taxed? Does the state impose its own estate tax? Are there property tax breaks for seniors? The answers can greatly affect the financial well-being of fixed-income retirees.

These 15 states impose the highest taxes on retirees, according to Kiplinger's 2015 analysis of state taxes. Five of them treat Social Security income just like Uncle Sam does -- taxing up to 85% of your benefits. Exemptions for other types of retirement income are limited or nonexistent in these states. Property taxes are on the high side, too. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)

Take a look.

#15 North Dakota

State Income Tax: 1.10% (on income as much as $37,450/individual, $62,600/joint) - 2.90% (on income more than $411,500)

State Sales Tax: 5%

Estate Tax/Inheritance Tax: No/No



Even if the cold weather doesn't bother you, the taxes here probably will. While the Peace Garden State has low tax rates, just about everything is taxable. That includes pensions (including out-of-state government pensions), distributions from retirement plans such as IRAs and 401(k)s, and even Social Security benefits, which are taxed to the same extent as on your federal tax return.

There are some exemptions to the state's sales tax, including food, heating fuel, water, electricity and prescription drugs.

The median property tax on North Dakota's median home value of $155,400 is $1,719 -- a relatively modest rate, according to the Tax Foundation.

#14 Maine

State Income Tax: 6.5% (on income of $5,200 - $20,900 for single filers, and $10,450 - $41,850 for joint filers) - 7.95% (on income more than $20,900/individual, $41,850/joint)

State Sales Tax: 5.5%

Estate Tax/Inheritance Tax: Yes/No



The Pine Tree State, like the majority of states, exempts Social Security benefits from state income taxes. It also excludes up to $10,000 per person of eligible retirement income, including income from public and private pensions and distributions from 401(k) plans and IRAs. However, taxes on income that's not exempt are steep. Property taxes here are high, too.

On the plus side, Maine is one of a few states that do not allow cities and towns to impose a local sales tax. Maine residents pay a 5.5% sales tax statewide on everything except food and prescription drugs.

The median property tax on Maine's median home value of $172,800 is $2,206, according to the Tax Foundation.

Another thing most Maine retirees won't have to worry about, starting in 2016, is the state estate tax. State lawmakers voted in July to peg the state's estate tax threshold to the federal estate tax exemption, effective January 1. That will increase the state's exemption from $2 million to $5.45 million.

#13 Indiana

State Income Tax: 3.3% (flat rate)

State Sales Tax: 7%

Estate Tax/Inheritance Tax: No/No



The Hoosier State offers some special tax breaks for retirees, and it doesn't tax Social Security benefits. However, the most common types of retirement income are taxed. Distributions from IRAs and 401(k)s, and income from private and public out-of-state pensions are fully taxable. Taxpayers 60 and older can exclude up to $5,000 from military pensions.

And while the state's flat income tax rate is low, all 92 counties impose their own income taxes -- a rare level of income taxation in the U.S.

Food and prescription drugs are exempt from state sales tax.

The median property tax on the state's median home value of $122,200 is $1,057, according to the Tax Foundation.

#12 Utah

State Income Tax: 5% (flat rate)

State Sales Tax: 4.7%

Estate Tax/Inheritance Tax: No/No



The Beehive State, which moved to a flat income tax in 2008, is one of 12 states that tax Social Security benefits. It doesn't exempt other types of retirement income, either, although some seniors qualify for a tax credit.

For residents 65 and older, the tax credit is worth as much as $450 per person ($900 per married couple), subject to income-eligibility limits. Taxpayers younger than 65 can claim a tax credit of as much as 6% of eligible retirement income or $288, whichever is less. The credit is phased out at 2.5 cents per dollar of modified adjusted gross income of more than $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for married people filing jointly. Distributions from IRAs and pension income qualify for the credit; withdrawals from 401(k) plans are ineligible.

Prescription drugs are exempt from the state sales tax. Food is taxed at a 3% rate. Local taxes in some jurisdictions can drive the combined sales tax rate as high as 8.08%.

If Utah still appeals to you, take comfort in the knowledge that property taxes are modest. The median property tax on Utah's median home value of $211,400 is $1,446, the 11th-lowest rate in the U.S., according to the Tax Foundation.

#11 Massachusetts

State Income Tax: 5.15% (flat rate)

State Sales Tax: 6.25%

Estate Tax/Inheritance Tax: Yes/No



The Bay State does not tax Social Security benefits, and most government employee pension income is also exempt from state taxes. But all other income, including withdrawals from 401(k) plans and IRAs, is taxed at a flat rate of 5.15%.

Food, prescription drugs and medical devices, fuel costs (gas, oil and electricity) and items of clothing priced up to $175 are exempt from state sales tax.

The median property tax on Massachusetts's median home value of $327,200 is $3,955, according to the Tax Foundation. Homeowners and renters who are 65 or older may qualify to claim a refundable tax credit on their state income taxes to offset real estate taxes (or rent) paid during the year on their principal home. To qualify, the taxpayer's total income cannot exceed $56,000 for a single filer, $70,000 for a head of household or $84,000 for joint filers.

Massachusetts's estate tax kicks in for estates valued at more than $1 million. Rates range from 0.8% to 16%. Property left to a spouse or qualified charity is exempt.

#10 New York

State Income Tax: 4% (on income up to $8,200/individual, $16,450/joint) to 8.82% (on income more than $1,046,350/individual, $2,092,800/joint)

State Sales Tax: 4%

Estate Tax/Inheritance Tax: Yes/No



On average, New Yorkers fork over 12.6% of their income in state and local taxes, according to the Tax Foundation. But retirees catch several breaks.

The state doesn't tax Social Security benefits or public pensions. It also excludes up to $20,000 for private pensions, out-of-state government pensions, IRAs and distributions from employer-sponsored retirement plans.

Food and prescription and nonprescription drugs are exempt from state sales taxes, as are greens fees, health club memberships, and most arts and entertainment tickets. Depending on where you shop, though, sales taxes on everything else can be steep. The average state and local combined sales tax rate is 8.48%, according to the Tax Foundation.

The median property tax on the state's median home value of $277,600 is $4,559, the 11th-highest rate in the U.S.

While New York has an estate tax, a law that took effect last year will make it less onerous. For fiscal year 2014 to 2015, estates valued at $2,062,500 are subject to an estate tax with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting January 1, 2019, it will be indexed to the federal exemption, which is $5.43 million for 2015.

#9 New Jersey

State Income Tax: 1.4% (on income up to $20,000) to 8.97% (on income more than $500,000)

State Sales Tax: 7%

Estate Tax/Inheritance Tax: Yes/Yes



The Garden State's tax policies create a thicket of thorns for some retirees. Its property taxes are the highest in the U.S., according to the Tax Foundation. While Social Security benefits, military pensions and some retirement income are excluded from state taxes, other retirement income could be taxed as much as 8.97%.

Residents 62 or older may exclude as much as $15,000 ($20,000 if married filing jointly) of retirement income, including pensions, annuities, IRAs, and 401(k) and employer-sponsored retirement plan distributions, if their gross income is $100,000 or less.

The median property tax on the state's median home value of $307,700 is $7,331.

New Jersey is one of only two states (Maryland is the other) that impose an inheritance tax and an estate tax. (An estate tax is levied before the estate is distributed; an inheritance tax is paid by the beneficiaries.) In general, close relatives are excluded from the inheritance tax; others face tax rates ranging from 11% to 16% on inheritances of $500 or more. Estates valued at more than $675,000 are subject to estate taxes of up to 16%. Assets that go to a spouse or civil union partner are exempt.

#8 Nebraska

State Income Tax: 2.46% (on income up to $3,000/individual, $6,000/joint) to 6.84% (on income above $29,460/individual, $58,920/joint)

State Sales Tax: 5.5%

Estate Tax/Inheritance Tax: No/Yes



The Cornhusker State taxes Social Security benefits, but new rules that took effect this year will exempt some of that income from state taxes. Nebraska taxes most other retirement income, including retirement-plan withdrawals and public and private pensions. And the top rate kicks in pretty quickly: It applies to taxable income above $29,460 for single filers and $58,920 for married couples filing jointly.

Starting in 2015, residents can subtract Social Security income included in federal adjusted gross income if their adjusted gross income is $58,000 or less for married couples filing jointly or $43,000 for single residents.

Food and prescription drugs are exempt from sales taxes. Local jurisdictions can add an additional 2% to the state rate. The average state and local combined sales tax rate is 6.8%.

The median property tax on the state's median home value of $132,700 is $2,438, the seventh-highest in the U.S.

Nebraska's inheritance tax is a local tax administered by counties, ranging from 1% to 18%. Assets left to a spouse or charity are exempt.

#7 California

State Income Tax: 1% (on income up to $7,749/individual, $15,498/joint) to 13.3% (on income above $1,000,000/individual, $1,039,374/joint)

State Sales Tax: 7.5%

Estate Tax/Inheritance Tax: No/No



California exempts Social Security and Railroad Retirement benefits, but all other forms of retirement income are fully taxed. That's significant, because wealthier residents of the Golden State pay the highest state income taxes in the U.S.

Early retirees who take withdrawals from their retirement plans before age 59 1/2 pay a 2.5% state penalty on top of the 10% penalty usually imposed by the IRS.

At 7.5%, state sales taxes are high, and local taxes can push the combined rate as high as 10%. The average combined state and local sales tax rate is 8.44%. California also has some of the highest gas taxes in the U.S., at 41 cents per gallon.

The median property tax on the state's median home value of $373,100 is $3,015.

#6 Montana

State Income Tax: 1.0% (on income up to $2,800) to 6.9% (on income above $17,000)

State Sales Tax: None

Estate Tax/Inheritance Tax: No/No



You won't pay sales tax to shop in the Treasure State, but that may be small comfort when you get your state tax bill. Montana taxes most forms of retirement income, including Social Security benefits.

Montana allows a pension-exemption of as much as $3,980 per person if federal adjusted gross income is $35,190 or less.

Property taxes are slightly lower than average here. The median property tax on the state's median home value of $190,100 is $1,630.

#5 Oregon

State Income Tax: 5% (on income up to $3,300/individual, $6,600/joint) to 9.9% (on income over $125,000/individual, $250,000/joint)

State Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No



The Beaver State's top income-tax rate of 9.9% hits residents earning more than $125,000 ($250,000 for married couples filing jointly). Although Oregon doesn't tax Social Security benefits, most other retirement income is taxed at your top income tax rate. However, you can deduct as much as $6,250 of federal income taxes paid on your Oregon return, and there is a retirement-income credit for seniors with certain income restrictions.

One bright spot in Oregon's tax picture: No sales tax. You can buy anything in the state and never pay a penny in sales taxes.

Property taxes are average: The median property tax on the state's median home value of $229,700 is $2,494.

Oregon's estate tax applies to estates valued at just $1 million or more. The top rate is 16%. Assets left to a surviving spouse or registered domestic partner are exempt.

#4 Minnesota

State Income Tax: 5.35% (on income up to $25,071/individual, $36,650/joint) to 9.85% (on income more than $154,950/individual, $258,261/joint)

State Sales Tax: 6.875%

Estate Tax/Inheritance Tax: Yes/No



The North Star State is a chilly tax climate for retirees. Social Security income is taxed to the same extent as it is on your federal return. Pensions are taxable regardless of whether they are military, government or private pensions. Income tax rates and the sales tax rate are high.

Food, clothing, and prescription and nonprescription drugs are exempt from state sales tax. A few cities and counties also add a sales tax.

The median property tax on the state's median home value of $180,100 is $2,148. Minnesota homeowners of any age may be eligible for a state-paid refund for homeowners whose property taxes are high relative to their incomes.

Minnesota taxes estates valued at more than $1.4 million at rates ranging from 10% to 16%. Assets left to a surviving spouse are exempt.

#3 Rhode Island

State Income Tax: 3.75% (on income up to $60,550) to 5.99% (on income more than $137,650)

State Sales Tax: 7%

Estate Tax/Inheritance Tax: Yes/No



Rhode Island, which was first on our 2014 list, became a little less unfriendly this year after lawmakers approved a budget that exempts Social Security benefits from state taxes for single filers with up to $80,000 in adjusted gross income and married filers with up to $100,000 in AGI starting in 2016. Still, Rhode Island taxes most other sources of retirement income, including pension income.

Groceries, most clothing and footwear, and prescription drugs are exempt from sales tax. Over-the-counter drugs such as aspirin are taxed, unless you have a prescription.

The median property tax on the state's median home value of $232,300 is $3,872, the 10th-highest in the U.S., according to the Tax Foundation. Homeowners 65 and older who earn $30,000 or less can get a state tax credit of up to $305 under the statewide property-tax relief program.

Estates valued at more than $1.5 million are subject to Rhode Island's estate tax, which takes 16% of the amount greater than the threshold. Assets left to a surviving spouse are exempt.

#2 Connecticut

State Income Tax: 3% (on income up to $10,000/individual, $20,000/joint) to 6.7% (on income above $500,000/individual, $1,000,000/joint)

State Sales Tax: 6.35% for most items; 7.8% for certain luxury items

Estate Tax/Inheritance Tax: Yes/No



The Constitution State is a tax nightmare for many retirees. Its real estate taxes are the fourth-highest in the nation, according to the Tax Foundation. Most types of retirement income are taxed, along with a portion of Social Security benefits for taxpayers above certain income thresholds.

Social Security is exempt for individual taxpayers with federal adjusted gross income of less than $50,000 and for married taxpayers filing jointly with federal AGI below $60,000. Retirement plans, private pensions, and out-of-state government and federal civil-service pensions are fully taxed. All federally taxable military income is exempt.

There are no local sales taxes in Connecticut, so you'll pay only the statewide rate of 6.35% on your purchases. As of July 1, clothing and shoes under $50 are no longer exempt from the state sales tax. Luxury items, such as jewelry worth more than $5,000, are taxed at 7.8%, which means a $6,000 diamond ring would cost you $6,468.

Median property tax on the state's median home value of $267,000 is $5,280.

Connecticut imposes a tax on estates valued at $2 million or more, at a progressive rate starting at 7.2%. The rate rises to a maximum of 12% for an estate valued above $10.1 million. Connecticut is the only state with a gift tax, which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents.

#1 Vermont

State Income Tax: 3.55% (on income up to $37,450/individual, $62,600/joint) to 8.95% (income more than $411,500)

State Sales Tax: 6%

Estate Tax/Inheritance Tax: Yes/No



The Green Mountain State doesn't coddle retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont treats Social Security benefits the same way the federal government does, which means as much as 85% of your benefits could be taxed.

In an effort to close the state's $100 million budget gap, Vermont now limits deductions to $15,750 for single residents and $31,500 for married couples. With that in mind, Vermont moves up to the unenviable top spot on our list of least tax-friendly states for retirees.

Local jurisdictions can add 1% to the state sales tax. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But you'll pay 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.

The median property tax on the state's median home value of $218,300 is $3,727, the ninth-highest in the U.S., according to the Tax Foundation. Eligible Vermont residents can make a claim for a rebate of their school and municipal property taxes if their household income does not exceed a certain level. (Generally, household incomes of $109,000 or more do not receive an adjustment.)

Vermont taxes estates that exceed $2.75 million at a flat rate of 16% on the amount greater than the threshold. Assets left to a surviving spouse are exempt.

SEE ALSO: 10 Best States for Taxes on Retirees

10 Least Tax-Friendly States for Retirees -- 2014 Rankings

1. Rhode Island
2. Vermont
3. Connecticut
4. Minnesota
5. Oregon
6. Montana
7. California
8. Nebraska
9. New Jersey
10. New York








Kiplinger updates these rankings annually. Above is our 2014 list of the ten least tax-friendly states for retirees. The list is based on Kiplinger's analysis of state tax laws; information is gathered from state tax department Web sites, CCH and the Tax Foundation.