Tuesday, March 17, 2015

10 Most Tax

10 Most Tax-Friendly States for Retirees

These 10 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.

SOURCES: State tax departments, CCH and the Tax Foundation.

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