10 Best States for Taxes on Retirees

35548132_sRetirees 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 your other forms of retirement income, including IRAs and pensions? Does the state impose its own estate tax, which might subtract from your legacy? The answers could determine which side of the state border you’ll settle on in retirement.

These 10 states impose the lowest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. All of these states exempt Social Security benefits from state taxes. Most exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans.

For a look at taxes on retirees in every state, visit our Retiree Tax Map – updated for 2016. 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. And take a long view: Some low-tax states are facing fiscal difficulties that could force them to hike taxes in the future to remedy fiscal shortfalls.

10. Tennessee

  • State Income Tax: None
  • Average State and Local Sales Tax: 9.46%
  • Estate Tax/Inheritance Tax: No/No

The Volunteer State moves onto our most-friendly list this year for two reasons: It eliminated its inheritance tax as of January 1, and it reduced its tax on stock dividends and interest income—known as the Hall tax– from 6% to 5%. The state plans to phase out the Hall tax entirely by 2022. Because the state has no income tax on other forms of income, your Social Security benefits, IRA distributions and pensions are unscathed.

Tennessee bumps Arizona from our list (Arizona, while still tax-friendly, taxes distributions from retirement plans at ordinary income rates).

The median property tax on the median home value of $142,900 in Tennessee is $1,066, the 13th-lowest rate in the U.S. Gas taxes are 21 cents a gallon, less than the national average of 30 cents.

Tennessee makes up for low taxes in other areas by charging high sales taxes. The combined state and local tax rate of 9.46% is the second-highest in the U.S. Groceries are taxed at 5% by the state, plus whatever local rate is in effect. Prescription drugs are exempt.

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