Maybe you’re thinking of retiring to another state to be near family — or better weather.
But before packing up your household, check out your destination’s taxes.
Below are the five least tax-friendly states for retirees. Results are based on the estimated state and local tax burden in each state for a retired couple with a mixture of income from Social Security, an IRA, a private pension, interest and dividends, and capital gains.
We also gave them a $400,000 home (with a small mortgage) and $10,000 in deductible medical expenses.
For a complete breakdown of state taxes on retirees, go to Kiplinger.com/links/retireetaxmap.
- Nebraska earns the dubious distinction as the least tax-friendly state for retirees because it taxes some Social Security benefits and most other retirement income, including IRA withdrawals, 401(k) funds, and public and private pensions.
The average property tax rate in Nebraska is high, too. For a $400,000 home, the statewide average tax is $7,421 per year.
That’s the eighth-highest property tax amount in country. Nebraska has no estate tax, but it has an inheritance tax with rates ranging from 1% to 18%.
- Connecticut is a tax nightmare for many retirees, but the state has endeavored to make its taxes less prohibitive for seniors.
In 2019, 14% of income from a pension or annuity is exempt for taxpayers with federal adjusted gross income of less than $75,000 (less than $100,000 for joint filers).
The exemption percentage will increase 14 percentage points each year until it reaches 100% for the 2025 tax year.
Military pensions are also excluded from state taxes. For residents with federal adjusted gross income, or AGI, over $75,000 ($100,000 for joint filers), 25% of Social Security benefits taxed at the federal level are taxed by Connecticut.
Connecticut also has the fourth-highest property taxes in the U.S. It imposes an estate tax on estates valued at $5.1 million or more in 2020. And Connecticut is the only state with a gift tax.
- Kansas exempts military, federal government and in-state public pensions from state taxes, but distributions from IRAs and 401(k) plans and out-of-state public pensions are fully taxed.
Kansas also taxes Social Security benefits received by residents with a federal AGI of $75,000 or more.
The state’s average combined state and local sales tax rate is the eighth-highest in the United States. Property taxes are above the national average as well.
- Wisconsin exempts Social Security benefits from state taxes, but income from pensions and annuities, along with distributions from IRAs and 401(k) plans, is generally taxable.
Property taxes are the sixth-highest in the country. Plus, there are no special provisions that reduce property taxes for retirees.
On the plus side, Wisconsin has the eighth-lowest combined average state and local tax rate in the nation.
Minnesota taxes Social Security income to the same extent that it’s taxed on your federal return, although residents can deduct up to $4,020 in benefits from their state income ($5,150 for joint filers).
Pensions are taxable, unless they’re from the military. Distributions from IRAs and 401(k) plans are taxed, too.
The average combined state and local sales tax rate in Minnesota is above the national average. For 2020, estates valued at more than $3 million are subject to a maximum estate tax rate of 16%.