State Taxes in Retirement: Where You Live Can Save You Thousands

Richard and Susan spent their careers in Oregon, retiring with $100,000 in annual income from Social Security, a pension, and IRA withdrawals. Their state income tax bill: roughly $6,000 per year.

Their friends Tom and Ellen retired the same year with nearly identical income — same sources, same amounts. Their state income tax bill: zero. Tom and Ellen moved to Florida.

Over 20 years of retirement, that single decision — where to live — will save Tom and Ellen approximately $120,000 in state taxes alone.

"We didn't move just for taxes," Ellen clarified. "We genuinely wanted the weather, the beach, to be near the grandkids. But knowing we'd save six thousand dollars every year made the decision easier."

Richard and Susan aren't wrong to stay in Oregon. They love Portland, their community, their doctors, their life. But they're paying for that choice — literally, every April.

The question isn't whether you should move for taxes. It's whether you understand what staying — or moving — actually costs.

The nine states where retirement income is tax-free

Nine states have no state income tax at all. Whatever you earn from Social Security, pensions, IRA withdrawals, capital gains, or investments, these states take zero percent.

Alaska offers the most dramatic combination: no income tax and no state sales tax (though local sales taxes apply in some areas). The catch is obvious — it's cold, it's remote, and the cost of living in some areas is high. But for retirees who love the outdoors and don't mind winters, the tax savings can be substantial.

Florida is the classic retirement destination. No income tax, no estate tax, reasonable property taxes (especially with the homestead exemption), and a 6% sales tax that exempts groceries and medicine. The weather draws people, but the tax structure keeps them.

Nevada offers no income tax and no corporate income tax, with property taxes among the lowest in the nation. The sales tax of 6.85% is higher than some states, but the overall tax burden for retirees is light. Las Vegas and Reno provide urban amenities; the rest of the state offers outdoor recreation and lower costs.

New Hampshire technically has no income tax on wages, Social Security, or pensions, but it did tax dividends and interest until recently. That tax is being phased out and will be gone completely by 2027. Property taxes are among the highest in the nation, which partially offsets the income tax advantage.

South Dakota combines no income tax with low property taxes and a moderate 4.5% sales tax. The cost of living is reasonable, and the state has become a quiet favorite among retirees who don't need to be near major metro areas.

Tennessee eliminated its tax on dividends and interest in 2021, leaving no state income tax of any kind. The 7% sales tax is among the highest in the nation, but it doesn't apply to most groceries. Nashville and the surrounding areas offer cultural amenities that many no-tax states lack.

Texas is the second-largest state with no income tax. The trade-off is property taxes — among the highest in the country, which can significantly impact retirees who own valuable homes. But if you rent or buy a modest property, the overall tax burden is still favorable.

Washington has no income tax but a 6.5% sales tax (higher in some localities) and no exemption for groceries. The cost of living in Seattle is high, but the rest of the state offers more affordable options. Estate taxes kick in at $2.19 million, lower than the federal exemption.

Wyoming rounds out the no-tax states with the lowest overall tax burden of any state. No income tax, 4% sales tax, low property taxes, and no estate tax. The trade-off is geographic isolation and limited healthcare options in rural areas.

States that exempt specific retirement income

Beyond the nine no-income-tax states, several others offer substantial exemptions for retirement income specifically.

Illinois exempts all retirement income from state taxation — Social Security, pensions, IRA and 401(k) distributions, everything. If your income comes from retirement accounts, you pay zero state income tax. This makes Chicago and its suburbs surprisingly competitive with no-tax states for retirees.

Mississippi exempts Social Security, all public and private pensions, and IRA/401(k) distributions. The only retirement income that's taxed is income from continuing employment. For someone living purely on retirement savings and Social Security, Mississippi offers a zero percent effective rate.

Pennsylvania exempts Social Security, pensions, and retirement account distributions from state income tax. At 3.07%, the flat rate is low anyway — but retirees often pay nothing or close to it. Combined with reasonable property taxes (especially for seniors with exemptions), Pennsylvania offers an underrated tax environment for retirement.

Alabama exempts Social Security and most pension income from state taxation. IRA and 401(k) withdrawals are taxed, but the rates are relatively low. The state doesn't get much attention from tax-focused relocators, but the numbers can be competitive.

These exemptions matter more than headline rates. A state with a 5% income tax that exempts retirement income will cost you less than a state with a 3% tax that doesn't.

States that tax everything — including Social Security

At the other end of the spectrum, some states tax retirement income aggressively.

California applies its high income tax rates — up to 13.3% — to pensions, IRA withdrawals, and most other retirement income. Social Security is exempt at the state level (as it is in most states), but everything else gets taxed. A retiree with $100,000 in pension and IRA income might pay $5,000 or more in state taxes.

Oregon taxes retirement income at rates up to 9.9%, with no exemptions for pensions or retirement account distributions. Social Security is exempt, but that's the only break. The state's beauty and quality of life come with a significant tax cost.

Connecticut taxes Social Security for higher earners and applies income tax to all other retirement income. The rates aren't as high as California's, but the lack of exemptions means most retirement income is fully taxed.

Minnesota has been taxing Social Security for decades, though it's currently phasing out that tax. Pension and retirement account income remains fully taxable at rates up to 9.85%. The state's excellent public services come funded partly by retirees.

Vermont, Nebraska, and a handful of other states round out the group that taxes most retirement income, including Social Security for those above certain thresholds.

Why income tax isn't the whole story

Looking only at income tax rates misses the full picture. Several other taxes significantly affect retirees.

Property taxes vary enormously by state and locality. New Jersey has the highest property taxes in the nation — a $300,000 home might cost $7,000 or more annually. Texas, despite having no income tax, has property taxes nearly as high. Meanwhile, Alabama, Louisiana, and South Carolina have property taxes a third of New Jersey's level.

For retirees who own their homes outright, property taxes can be the single largest ongoing tax expense. A state with no income tax but high property taxes might actually cost more than a state with moderate income taxes and low property taxes.

Many states offer property tax relief specifically for seniors. Some freeze assessed values at age 65. Others provide homestead exemptions that reduce taxable value. A few offer outright deferrals, allowing seniors to postpone property taxes until they sell or die. These programs can dramatically change the calculation for long-term residents.

Sales taxes affect how far your retirement income stretches. Tennessee and Louisiana have combined state and local rates approaching 10% — meaning every $1,000 you spend costs an extra $100 in taxes. Oregon, Montana, Delaware, and New Hampshire have no sales tax at all. For retirees who spend rather than save most of their income, this difference adds up.

Estate and inheritance taxes matter for those planning to leave assets to heirs. Only 12 states plus D.C. have estate taxes, and exemptions vary from about $1 million (Oregon and Massachusetts) to the federal exemption level ($13.6 million in 2024). Six states have inheritance taxes that apply to the recipients rather than the estate. Maryland is the only state with both.

A tale of three retirements

Let's make this concrete with a married couple in their late 60s having $100,000 in annual income from combined Social Security, a pension, and IRA withdrawals.

Living in Texas: Their state income tax is zero. Property taxes on a $300,000 home run about $5,400 per year. Sales tax at 8.25% (combined) costs roughly $3,000 annually on $40,000 of spending (excluding groceries). Total state and local taxes: approximately $8,400.

Living in Pennsylvania: Their state income tax is zero — pension and IRA income are exempt, and Social Security isn't taxed at the state level. Property taxes on a similar home run about $4,500. Sales tax at 6% costs $2,400 on the same spending. Total state and local taxes: approximately $6,900.

Living in California: Their state income tax on $100,000 comes to roughly $4,800 after deductions. Property taxes on a comparable home (which costs more in California) run about $4,000 thanks to Prop 13 limits. Sales tax at 7.25%+ costs $2,900. Total state and local taxes: approximately $11,700.

The spread between the highest and lowest: $4,800 annually, or nearly $100,000 over a 20-year retirement. And we haven't even factored in the much higher housing costs in California that would increase property taxes further without Prop 13 protection.

When relocation makes sense

Moving for taxes alone rarely makes sense. But when tax savings align with other life priorities, relocation can be transformative.

The strongest case for a tax-motivated move comes when you're already considering relocation for other reasons — proximity to family, better weather, lower cost of living, lifestyle preferences. If you were thinking about moving anyway, tax implications should absolutely inform where you go.

The timing of a move matters for taxes. If you're planning large Roth conversions, capital gains realizations, or other one-time income events, completing those after establishing residency in a no-tax or low-tax state saves immediate dollars. Conversely, if you're moving from a low-tax state to a high-tax state, front-loading those transactions before the move makes sense.

Some states have aggressive tax authorities that pursue former residents who maintain ties — part-time homes, business interests, club memberships, voter registration. California is notorious for auditing departed high-income residents. If you're leaving a state like California for tax reasons, make a clean break: change your driver's license, register to vote in the new state, spend at least 183 days in your new home, and update the address on all financial accounts.

When staying makes more sense than the math suggests

Money isn't everything. Richard and Susan in Oregon know they're paying $6,000 a year more than their Florida friends. But they've also lived in Portland for 35 years. Their doctors know their medical histories. Their bridge club meets every Thursday. Their daughter lives twenty minutes away.

What's the dollar value of having your cardiologist of 15 years versus starting fresh with someone who's never seen your chart? What's proximity to a grandchild worth? How do you price the ability to walk to a favorite coffee shop where the baristas know your name?

These aren't rhetorical questions. Every retiree weighs them differently. The financial analysis tells you what the numbers say. The life analysis tells you what to do with that information.

Some retirees optimize for minimum taxes. Others optimize for maximum life satisfaction, and the taxes are what they are. Neither approach is wrong — but going in with eyes open about the trade-off is essential.

Strategic approaches for the tax-conscious

If taxes are a significant factor in your decisions, several strategies can help regardless of whether you move.

Doing Roth conversions before relocating to a high-tax state locks in tax treatment at lower rates. If you're in Florida but plan to move to California to be near children, accelerate conversions while you're still a Florida resident. Those converted dollars will come out tax-free regardless of where you live later.

Establishing residency in a low-tax state before large income events requires planning and genuine residency changes. If you're selling a business or expecting a large one-time payout, consider whether relocating first makes sense. But the residency must be real — not a paper address while you continue living elsewhere.

Splitting time between states works for some retirees but requires careful tracking. Most states tax you as a resident if you spend more than 183 days there. If you're trying to maintain no-tax-state residency while spending significant time in a taxing state, keep detailed records of your location and be prepared for potential audits.

Considering state taxes when choosing where to take income from adds a layer to retirement withdrawal strategy. If you live in a state that exempts pensions but taxes IRA withdrawals, drawing down the pension before the IRA changes your total tax picture.

The bottom line on state taxes

Where you live in retirement can mean tens of thousands of dollars in lifetime state taxes — or it can mean relatively little if you're in a state that exempts retirement income anyway.

The decision about where to live encompasses far more than taxes: family, healthcare, cost of living, climate, community, and personal preferences all matter. But ignoring the tax dimension leaves money on the table.

Richard and Susan made their choice consciously. They know the cost of staying in Oregon. They've decided the life they've built there is worth $6,000 a year and more.

Tom and Ellen made a different choice. They traded Portland's culture for Tampa's beaches, old friendships for new grandchild time, and saved six figures in taxes along the way.

Both couples are right. The key is making the choice deliberately, with full knowledge of what it costs.

Want help analyzing how state taxes affect your retirement plan? Connect with a retirement advisor who can model scenarios for different locations and help you make an informed decision.