Best Low-Tax Places to Retire

How Taxes Impact Your Retirement Income

Taxes are one of the most underestimated drains on retirement income. During your working years, taxes are deducted from your paycheck before you ever see the money, making them easy to overlook. In retirement, the dynamic shifts. You are living on a fixed pool of savings, and every dollar that goes to taxes is a dollar that does not pay for groceries, healthcare, travel, or anything else that makes retirement enjoyable. Over a 20- to 30-year retirement, state and local taxes can quietly consume tens or even hundreds of thousands of dollars.

Consider a retiree with $60,000 per year in total income from Social Security, a pension, and IRA withdrawals. In a state with a 5 percent flat income tax that also taxes Social Security, this retiree could pay $3,000 per year in state income tax alone. Over 25 years, that is $75,000. Add in property taxes that might be $1,000 to $3,000 per year higher than a tax-friendly state, and the total tax penalty for choosing the wrong state could exceed $100,000 to $150,000 over the course of retirement. That is money that could have funded a decade of travel, a new car every few years, or a financial cushion for unexpected medical expenses.

The lesson is clear: where you retire is a tax decision, and it should be treated with the same rigor you would apply to choosing an investment portfolio or a Medicare plan. The good news is that the United States offers enormous tax diversity. Some states are aggressively tax-friendly for retirees, while others tax nearly every source of retirement income. By understanding the full tax landscape, you can choose a location that keeps more of your money working for you.

States With No Income Tax

Seven states levy no income tax at all on any type of income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two additional states, Tennessee and New Hampshire, do not tax earned income (wages, salaries, Social Security, pensions, or IRA withdrawals). New Hampshire does tax interest and dividends at 5 percent, though this tax is being phased out and is set to fully expire. Tennessee eliminated its Hall Tax on investment income completely in 2021.

For retirees, the absence of a state income tax means that withdrawals from traditional IRAs, 401(k)s, and other tax-deferred retirement accounts are taxed only at the federal level. Pension income, which is taxed by many states, passes through untouched. Social Security benefits, which are partially taxable at the federal level for higher-income retirees, face no additional state taxation.

However, no-income-tax states are not automatically the cheapest overall. Some compensate for the lack of income tax with higher property taxes (Texas is notorious for this, with effective rates often exceeding 2 percent), higher sales taxes, or higher costs for government services. Alaska has no income tax and no sales tax, but its cost of living is among the highest in the nation due to its remote location and harsh climate. The key is to evaluate the total tax burden, not just the income tax rate.

Among the no-income-tax states, Florida stands out as the most popular retirement destination. It combines no income tax with no estate or inheritance tax, relatively low property taxes in many counties, and a moderate sales tax rate of 6 percent (plus local surcharges). Its warm climate, abundant healthcare infrastructure, and deep inventory of 55+ communities make it the single most popular state for retirees relocating for tax savings. Nevada offers similar tax advantages with the added draw of low property taxes and a desert climate that appeals to retirees from the western states. Tennessee combines no income tax with a low cost of living, beautiful scenery, and growing metro areas like Nashville and Knoxville that offer excellent healthcare and cultural amenities.

Property Taxes and Retirees

Property taxes are the most variable and often the most frustrating tax for retirees. Unlike income taxes, which disappear if your income drops, property taxes are assessed on the value of your home regardless of your income, your age, or your ability to pay. For retirees on fixed incomes who own their home outright, a rising property tax bill can feel like paying rent on a property they already own.

The variation in property taxes across the United States is staggering. New Jersey has the highest effective property tax rate in the nation, averaging over 2.2 percent. On a $350,000 home, that translates to $7,700 per year. Illinois, Connecticut, New Hampshire, and Texas also have effective rates above 1.5 percent. At the other end of the spectrum, Hawaii, Alabama, Colorado, Louisiana, and West Virginia have effective rates below 0.6 percent. On that same $350,000 home, a 0.5 percent rate means a property tax bill of just $1,750, a savings of nearly $6,000 per year compared to New Jersey.

Many states offer homestead exemptions that reduce the taxable value of a primary residence. Florida's homestead exemption is among the most generous, sheltering up to $50,000 in assessed value and capping annual assessment increases at 3 percent through the Save Our Homes provision. Texas offers a $100,000 homestead exemption for homeowners age 65 and older, plus an optional local-option freeze that locks in school district tax amounts at the level they were when you turned 65 or became disabled.

Senior freezes and deferrals are additional tools. Several states, including Illinois, New Jersey, and Georgia, offer programs that freeze the assessed value of a senior's home, preventing tax increases even as market values rise. A few states and localities offer property tax deferral programs that allow seniors to postpone payment until the home is sold, effectively converting property taxes into a lien that is settled from estate proceeds. These programs can be valuable for asset-rich, cash-poor retirees who want to stay in their home without being priced out by rising taxes.

Social Security Taxation by State

At the federal level, up to 85 percent of your Social Security benefits may be taxable if your combined income exceeds certain thresholds ($25,000 for single filers, $32,000 for married couples filing jointly). But whether your state also taxes Social Security is a separate question, and the answer has a meaningful impact on your net income.

As of 2025, the vast majority of states do not tax Social Security benefits at all. Only about a dozen states impose any tax on Social Security, and several of those offer significant exemptions or deductions that shield low- and moderate-income retirees from the tax. The states that do tax Social Security to some degree include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, though several of these are in the process of phasing out or reducing the tax.

For retirees who rely heavily on Social Security, avoiding states that tax benefits is a straightforward way to increase take-home income. On a $30,000 annual Social Security benefit, a state tax rate of 4 to 5 percent on the taxable portion could cost $500 to $1,200 per year. Over a 25-year retirement, that adds up to $12,500 to $30,000 in additional taxes that could have been avoided entirely by choosing a different state.

It is worth noting that state tax laws change frequently. Several states that currently tax Social Security have pending legislation to reduce or eliminate the tax, and what is true today may not be true in five years. When evaluating states for retirement, look at both the current law and the legislative trend. A state that is actively reducing its tax on Social Security is likely to become more retiree-friendly over time.

Sales Tax and Everyday Spending

Sales tax is often overlooked in retirement tax planning because each individual transaction is small. But when you add up every taxed purchase over the course of a year, sales tax differences between states become significant, particularly for retirees who spend a larger share of their income on goods and services subject to sales tax.

State sales tax rates range from 0 percent (Alaska, Delaware, Montana, New Hampshire, Oregon) to 7.25 percent (California), with most states falling between 4 and 7 percent. Local governments in many states add additional sales taxes, pushing combined rates above 10 percent in some jurisdictions. The highest combined rates in the country are found in parts of Louisiana, Tennessee, Arkansas, Washington, and Alabama, where state plus local rates can reach 9.5 to 11 percent.

However, what is taxed matters as much as the rate. Most states exempt groceries from sales tax, but a few (including Alabama, Mississippi, and South Dakota) tax groceries at the full rate or a reduced rate. States that tax groceries disproportionately burden retirees and low-income households who spend a higher percentage of their income on food. Prescription drugs are exempt from sales tax in nearly every state, but over-the-counter medications and medical supplies may not be.

For a retiree spending $30,000 per year on taxable goods and services, the difference between living in a no-sales-tax state and a state with an 8 percent combined rate is $2,400 per year. Over a 25-year retirement, that is $60,000 in purchasing power. The five states with no sales tax (Alaska, Delaware, Montana, New Hampshire, Oregon) offer a meaningful advantage for retirees who want to keep every dollar.

The Complete Tax Picture

The biggest mistake retirees make in tax planning is optimizing for a single tax while ignoring the rest. Moving to a no-income-tax state is not a net win if that state has sky-high property taxes that more than offset your income tax savings. Similarly, a state with low property taxes and no sales tax may levy a steep income tax on retirement account withdrawals that erases the other advantages.

The only way to accurately compare your tax burden across states is to model your complete tax picture in each candidate location. This means estimating your total annual spending on income taxes (state and local), property taxes (based on the actual home you would buy), sales taxes (based on your spending patterns), and any other state-specific taxes such as estate taxes, vehicle taxes, or excise taxes.

Several organizations publish annual studies that attempt to rank states by total tax burden on retirees. The Tax Foundation, Kiplinger, and WalletHub all produce useful rankings, though their methodologies differ. As a general rule, the states that consistently rank as the most tax-friendly for retirees include Florida, Nevada, Wyoming, Tennessee, and South Dakota, which combine no income tax with moderate property taxes and reasonable sales tax rates. States that consistently rank as the least tax-friendly for retirees include New York, New Jersey, Connecticut, Illinois, and California, where high income taxes, property taxes, or both create a heavy cumulative burden.

Working with a financial advisor or CPA who specializes in retirement tax planning is strongly recommended before making a relocation decision. A qualified professional can model your specific income sources, deductions, and spending patterns across multiple states and produce a side-by-side comparison that reveals the true tax cost of each option. This analysis typically costs a few hundred dollars and can save you tens of thousands over the course of your retirement. Tax planning is not the only factor in choosing a retirement city, but it is one of the most quantifiable, and ignoring it is leaving money on the table.