Best tax-friendly states for working retirees

[UNITED STATES] As more Americans choose to work during retirement-whether for financial security, personal fulfillment, or both-the impact of state taxes on post-career earnings and retirement income has never been more significant. For retirees who plan to continue working, selecting a tax-friendly state can help stretch savings and maximize income. Here’s a comprehensive look at the most tax-friendly states for retirees who work in retirement, based on the latest data and expert analysis.

Top Tax-Friendly States for Working Retirees

The following states consistently rank as the most tax-friendly for retirees who keep working, thanks to their favorable tax structures and policies:

1. Mississippi

Mississippi stands out as one of the most tax-friendly states for retirees. The state exempts Social Security benefits, pensions, 401(k) and IRA distributions, and U.S. Department of Veterans Affairs payments from state income tax. Other income is taxed at a flat rate, set to decrease to 4% by 2026. Mississippi also has no estate, gift, or inheritance taxes, and boasts the lowest median property tax bill in the nation ($1,189)26. However, sales taxes-especially on groceries-are relatively high.

2. South Dakota

South Dakota imposes no state income tax, meaning wages, retirement income, dividends, and interest are all untaxed. There are also no inheritance or estate taxes. While property taxes are slightly above the national average, the overall cost of living remains low, making South Dakota a strong choice for working retirees.

3. Wyoming

Wyoming offers retirees a tax haven with no state income tax, no estate or inheritance taxes, and low property taxes (median bill: $1,659). Sales taxes are moderate, and the state’s low population density and natural beauty are added perks for those seeking a peaceful retirement.

4. Tennessee

Tennessee has fully eliminated its state income tax, including on interest and dividends. Social Security, pension, and retirement account withdrawals are all untaxed. Property taxes are among the lowest in the country, though sales taxes are higher than average. Tennessee’s vibrant cities and mild winters add to its appeal.

5. Nevada

Nevada levies no state income tax, making all forms of retirement and work income tax-free at the state level. Property taxes are low, and there are no estate or inheritance taxes. However, Nevada’s sales tax is among the highest in the nation, and the cost of living is moderate.

6. Texas

Texas does not tax income, including wages or retirement benefits. While property taxes are high, recent relief packages may ease this burden for some homeowners. There are no estate or inheritance taxes, but sales taxes are on the higher side

7. Florida

Florida is a perennial favorite for retirees, thanks to its absence of state income tax and relatively low property taxes. Social Security, pensions, and retirement account withdrawals are all tax-exempt at the state level, and the state offers a homestead exemption for homeowners. Florida’s warm climate and amenities make it especially attractive for retirees who wish to keep working.

8. Iowa

Iowa has recently improved its tax-friendliness for retirees. As of 2023, retirement income for individuals 55 and older is excluded from taxation, and starting in 2025, there will be no inheritance or estate tax. Property taxes are higher than average, but the overall cost of living is reasonable.

9. Alaska

Alaska has no state income tax, no capital gains tax, and no inheritance or estate taxes. Property taxes are moderate, and the overall tax burden is low. However, the higher cost of living and remote location may not appeal to all retirees.

10. Pennsylvania

While Pennsylvania does have a flat state income tax, it exempts Social Security, pension, and retirement account withdrawals for retirees. Property and sales taxes are moderate, and the state’s central location and historical significance may appeal to many.

What Makes a State Tax-Friendly for Working Retirees?

No State Income Tax: States like Florida, Texas, and Nevada do not tax any income, including wages earned in retirement.

Exemptions for Retirement Income: Even in states with income tax, many exempt Social Security, pension, and retirement account withdrawals.

Low Property and Sales Taxes: These can offset the benefits of no income tax, so it’s important to consider the full tax picture.

No Estate or Inheritance Taxes: This ensures that retirees can pass on more to their heirs.

Other Considerations

While taxes are a major factor, retirees should also weigh:

• Cost of living
• Healthcare access
• Climate and lifestyle
• Proximity to family and support networks

For retirees who plan to keep working, the most tax-friendly states are those that combine no state income tax with low property and sales taxes, and generous exemptions for retirement income. Mississippi, South Dakota, Wyoming, Tennessee, Nevada, Texas, Florida, Iowa, Alaska, and Pennsylvania all offer compelling tax advantages, but the best choice will depend on each retiree’s unique financial situation and lifestyle preferences.

As tax laws can change, retirees are advised to consult with a tax professional or financial advisor before making a relocation decision. By choosing wisely, working retirees can keep more of their hard-earned income and enjoy a more financially secure retirement.