Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes—and how generous are the property-tax breaks for seniors? Are Social Security benefits taxed? What about other forms of retirement income—including IRAs and pensions? Does the state impose its own estate tax that might subtract from your legacy? The answers might just determine which side of the state border you’ll settle on in retirement.
These 10 states impose the highest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. Three of them treat Social Security benefits just like Uncle Sam does—taxing as much as 85% of your benefits. Exemptions for other types of retirement income are limited or nonexistent. Property taxes are on the high side, too. And if that weren’t bad enough, some of these states are facing significant financial problems that could force them to raise taxes, cut services, or both.
- State Income Tax: 5% flat tax
- Average State and Local Sales Tax: 6.69%
- Estate Tax/Inheritance Tax: No/No
The Beehive State joins our list of least tax-friendly states this year, replacing Rhode Island (which no longer taxes Social Security benefits for residents with adjusted gross income of as much as $80,000/individual, $100,000/joint).
Utah offers few tax breaks for retirees. Income from IRAs, 401(k)s, pensions and Social Security benefits is taxable at the 5% flat tax rate. The state does offer a retirement-income tax credit of as much as $450 per person ($900 for a married couple). The credit is phased out at 2.5 cents per dollar of modified adjusted gross income over $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for married people filing jointly.
On the plus side, property taxes are modest. Median property tax on the state’s median home value of $223,200 is $1,480, 11th-lowest in the U.S.