10 Worst States When it Comes to Taxes for Those Retired

No matter where you decide to retire in the country, whether it’s close to the coast, the wilderness, or a city, it is essential that you research what the taxes will be like before you decide to pull the trigger and move to your new destination. Not doing your due diligence can lead to getting hit with taxes that will take a considerable chunk of your retirement income.

State and other local tax rates can range very differently from one state to the other. There can even be as big of a $10K difference or more a year. That is a large amount of money that some people may not be able to afford or will make them struggle through their retirement. To make sure that you know what kind of financial impact you are getting yourself into, be sure to look into the tax matters of the new state you are considering. Or, if you plan to stay in your current state, be sure that it is also the best option for you financially.

There are many articles and reports in regards to what the tax rates and cost of living expenses are for each state. Be sure to check out those out.

However, this article will cover the ten states that have the largest tax implications for those that are in retirement. We will go over the nations from least to worst based on the projected state, and local tax load for an assumed married couple in retirement–we will call them Jerry and Erika. They have different sources of earnings that come from a pension, an IRA, capital gains, interest, and dividends from stocks, along with their Social Security benefits. They also have a home that is worth $400K, which they pay a small mortgage on along with a $10K deductible for medical costs.

New York

The first state to make the list of the top ten worst states with the highest taxes is New York. The lowest state income tax rate is about 4 percent on a yearly taxable income of $8.5K or below that for those that are filing alone. It is up to $17,150 for those that are filing jointly with your spouse. The highest rate is at 8.82 percent on taxable earning that is above $1,077,550 for individuals and $2,155,250 to couples filing jointly.

With that in mind, the average state and local sales tax is .01 percent from reaching 8.5 percent. The property tax average is about $1,812 for every $100K that the property is worth.

The state has a significant tax load in general, so it does not come as a surprise that it is the same for retirees. When it comes to taxes, property taxes are a significant expense. Base on the average tax rate in the state, the retired couple we mentioned earlier, Jerry and Erika, would have to fork up something like $7,246 every year just in property taxes along if they have a property that is in the value of $400K. Of course, this can even be higher in certain areas in New York that have a higher cost of living. But just at the average rate alone puts the state at the 9th for the highest amount in the United States.

The good news is that there are some tax breaks for senior citizens as public school districts and local governments can lower the determined value of their property by half. To be eligible, the property owner must be at least 65 years of age and will have to meet specific income limitations along with some other requirements. Those that are at least 65 or older and have an annual earning of up $86,300 are qualified for an enhanced STAR exemption for this year. With the exemption, the first $66,800 (for the school tax costs of 2019 to 2020) of their property value will not be liable to school property taxes.

The state’s average sales tax rate, which includes state and local, comes in at number 10 for the highest sales tax in the country. But, there are some items and services that are not taxes, such as food, gym memberships, medicine, tickets to most entertainment events, low-cost clothing apparel and shoes, and even more.

In regards to income taxes, New York is not as high as other states. First off, the state does not tax military, federal, and N.Y. government pensions. Social Security benefits are not liable to state taxes as well. But a private retirement plan that is worth more than $20K will be taxed. Such plans include traditional IRAs, 401(k)s, private pensions, and a government retirement plan from another state.

While there is no inheritance tax, New York’s estate tax has a cliff tax, which normally does not get calculated into the estate unless it is over $5.74M exemption amount this year. But if the worth of the estate is larger than the exemption amount–by 105 percent, the estate will be liable to pay full estate taxes.

Illinois

The state of Illinois as a flat state income tax rate of 4.95 percent, with the average state and local sales tax sitting at 8.76 percent. The property tax tends to be $2,408 for every $100K of the home’s worth. The state also has both an estate and inheritance tax.

In the Prairie state, most earnings from retirement plans, along with social security payments, are not liable to tax as they are exempt. The state also has a fairly low flat income tax rate of 4.95 percent. However, their property taxes are quite high, with the state average being ranked second as the highest in the U.S. About $9,634 will have to be paid in taxes on Ed and Erika’s $400,000 house.

But retirees can get some breaks with a homestead exemption that can clear up to $5K for most counties and $8K for Cook County. A senior citizen can also freeze the assessed value of their property if they have an income that is less than $65,001. There is also a tax deferral program available for up to $5K.

Illinois ranks seventh highest with state and local sales tax rates coming in at 8.78 percent. Some areas have a sales tax as high as 11 percent.

The state also has an estate tax on estates that are valued at $4M or above with an additional inheritance tax.

New Jersey

This state has an income tax of 1.4 percent on taxable earnings that are $20K or less. The tax rate ranges up to 10.75 percent on taxable earnings over $5M. They also have an average local and state tax of 6.6 percent, and its average property tax is $2,530 for every $100K that the house has in value. Although Jersey does not have an estate tax, there is an inheritance tax that is imposed.

The highest tax in New Jersey is property taxes–it has the highest average in the United States. If Jerry and Erika have their $400K house in New Jersey, they would be subject to pay $10,120 annually in property taxes. There is a freeze program for seniors that refund property tax increases for those that are qualified. You must be 65 years old and have resided in the state for ten years or more and receive earnings under certain limits. It was $83,013 last year.

For retirees that have a yearly household earning of $10K or less, there is a $250 deduction in property tax that you can be eligible for.

There is good news, however. The state has a reasonably low-income tax rate as there is an exemption for retirement earnings from IRAs, pensions, annuities, and other retirement savings plans. Single filers can exclude up to $60K, and those that are married but filing separately can exclude up to $40K. Married retires filing jointly can exclude up to $80 of earnings if they have a combined income of less than $100K.

Next year, the exemption limits will rise to $75,000 for single filers, $50K for those that are filing separately, and $100K for those that are filing jointly.

New Jersey does not tax Social Security payments as well.

The Garden State also has an average sales tax of 6.625 percent. However, because some places only apply half the rate for some sales, the state has an average combined sales tax of state and local at 6.6 percent.

The state also just did away with the estate tax, but there is an inheritance tax that can be 11 percent to 16 percent on inheritances that are worth $500 or more. The amount of tax calculated depends on who receives the estate and what the value of it is worth.

Rhode Island

The state charges a 3.75 percent tax on taxable earnings of up to $64,050. Earnings over $145,600 will be taxed at the rate of 5.99 percent. The average combined sales tax of local and state is at 7 percent. The average property tax is about $1,723 for every $100K. The state has an estate tax, but there is no inheritance tax.

The Ocean state ended up on the top ten list of highest taxes mainly in regards to their property taxes and taxes on income that are above the average earnings.

Retirees that have an AGI (adjusted gross income) over $85,150 (for single filers) and $106,400 (for joint filers) are liable to pay taxes on their Social Security payments. Those that bring in high earnings during retirement will not be able to qualify for an exemption of up to $15K for disbursements from retirement plans that are government, military, or even private. To be eligible, the adjusted gross income cannot be over $83,450 for people filing single, $83,475 for those that are filing separately but are married, and $104,350 for those that are filing jointly.

The average property tax rate in R.I. is listed as the eleventh highest in the country. If Jerry and Erika have their $400K house in this state, they would be paying around $6,892 every year just in property taxes. Those that are at least the age of 65 that have an income of up to $30K may be able to receive a tax credit from the state. Locally, governments in the state may also allow an exemption or tax break for retirees in regards to property taxes.

Another very high tax that the state imposes is their estate tax, which can be up to 16 percent! This year, estates that are valued at $1,561,719 or over will be subjected to this tax. However, the value limits change every year due to inflation. Along with Rhode Island, there are only two other states that impose estate taxes on properties that are valued under $2M.

The state has no local taxes when it comes to sales. Only the state sales tax of 7 percent is charged.

Vermont

The state income tax of Vermont starts at 3.35 percent for taxable earnings of up to $39,600 for being filing as single and up to $66,150 for those that are filing jointly. The tax can be up to 8.75 percent for those that have taxable earnings over $200K for single filers and over $243,750 for those that are filing as a couple.

It also has an average combined local and state sales tax of 6.22 percent. The average property tax charged is $1,908 for every $100K that the house is worth.

The state also has an estate tax, but they do not charge an inheritance tax.

Vermont is considered to have a very high rate when it comes to income tax. On top of that, a majority of income that is received by retirees is taxed along with Social Security for that are single and married that have a federal AGI of over $45K or $60K, respectively.

Though local governments can add 1 percent more to the state sales tax, the average sales with state and local combined, the rate is still at a low 6.22 percent. This rate is less than the country’s average. Nonprescription medicine, clothing apparel, and food for the home are not taxed. However, there is a 9 percent tax on restaurant food, ready-to-eat foods, and lodging. There is a 10 percent tax if you order beer or wine at a restaurant.

If a couple had their home worth $400K in Vermont, they would be facing about $7,634 in property taxes every year. This is the seventh-highest average in the country. Those that are least 65 years of age or older may be eligible to receive a tax break in the form of 24 percent of the Federal Elderly and Permanently Disabled Tax Credit for those that meet a limited income.

The Green Mountain State also has a flat 16 percent tax on estates that are worth more than $2.75M.

Minnesota

The minimum income tax rate starts at 5.35 percent for single and joint filers that earn up to $26,250 or $38,770, respectively. The rate can go up to 9.85 percent for those that make over $161,720 and $269,019, for single and joint filers, respectively.

The average local sales tax is 7.43 percent, with the average property tax at $1,224 for every $100K that the property is valued at.

Minnesota does not impose a tax on inheritance, but they do charge an estate tax.

The state is harsh on their taxes just like their winters. It can tax you up to the same amount as the federal level on you Social Security benefits, but for those that have earnings that subject them to paying taxes on their benefits may be able to get deductions up to $4,020 for those that are single, $2,575 for those that are married but filing separately, and $5,150 for those that are filing together.

Except for military pensions, all other pensions are subject to tax. Withdrawals made from 401(k)s and IRAs will be taxed as well.

Good news is that taxpayers that are 65 and up can deduct up to the amount of $9,600 or $12K for single and married filers, respectively, but only those that make up to $33,700 for singles or $42K for married couples can receive these deductions.

The state’s sales tax stands at 6.88 percent, but there are some counties and cities that put in an additional tax of up to 2 percent. The state’s average tax rate combined with local and state is 7.43 percent–over the country’s average.

The property taxes are a little over the standard in the state. Jerry and Erika would pay about $4,897 every year on their house worth $400K. Minnesota has a program that enables seniors that are 65 or older to defer a part of their property tax if they only take in up to $60K a year. The tax is called the Senior Citizen Property Tax Deferral Program.

This year in 2019, estates that are worth more than $2.7M are liable to a tax rate of 16 percent. Beginning next year, the exemption limit will increase to $3M. The inheritance passed to the spouse that is surviving is not subject to taxes.

Wisconsin

The Badger State charges a 3.86 percent income tax on taxable earnings of $11,450 for singles and up to $15,270 for those that are filing jointly. The rate will be 7.65 percent on single filers that make over $252,150 and $336,200 for those filing together.

The average combined state and local sales tax is at 5.44 percent, with average property taxes at $1,924 for every $100K.

There are no estate or inheritance taxes.

Earnings from annuities, pensions, withdrawals from 401(k)s, and traditional IRAs are typically taxed. However, Social Security payments are exempt from state income tax. Seniors that have a federal adjusted gross income of under $15K for singles and $30K for married couples can deduct up to $5K of their retirement earnings, which can include withdrawals from IRAs.

Wisconsin has the sixth-highest property taxes in the country. If Jerry and Erika bought a house in Wisconsin that was valued at $400K, they would be looking at paying $7,695 a year in property taxes. Though there are tax-deferral loans that are accessible for retirees that receive earnings under $20K, there aren’t special deductions or tax breaks that will bring down these property taxes.

However, the state has a very low state and local tax average of 5.44 percent, which puts them at the eight lowest average in the U.S. Also, your estate and inheritance are not liable taxes.

Kansas

The state of Kansas charges an income tax rate of 3.1 percent for singles that have a taxable earning of up to $15K and up to $30K couples filing jointly.

It has a high average of state and local sales tax with 8.67 percent. The state has an average property tax of $1,491 for every $100K the house is worth.

Kansas does not have taxes on estate and inheritance.

The state is pretty unforgiving when it comes to income taxes on retirees. Payouts from private retirement plans such as a traditional IRA or 401(k) are liable to be taxed to the fullest extent. Seniors that have a federal AGI of $75K or more will be subject to paying taxes on their Social Security benefits. Public pensions such as in-state, federal government, and military are not taxed, however.

Also, purchasing things in Kansas can make quite a dent in your wallet with its local and state average at 8.67 percent, which is the eighth highest rate in the nation.

The property taxes are above the U.S. mean as well, which has the state as the fifteenth highest in the country. Jerry and Erika would pay about $5,963 in property taxes for their $400K house. Those that are at least the age of 55 and older that make up to $35K may be eligible to receive a tax reimbursement of up to $700. In 2018, those that had earnings up to $19,800 or less with a home worth $350K or less were eligible for a reimbursement of up to 75 percent of the property taxes that were paid for.                                                                                                                                                                                                        Thankfully, the state does not tax on estates or inheritances.

Connecticut

Taxable earnings up to $10K for singles and up to $20K for joint filers are subject to a 3 percent income tax. The rate can be up to 6.99 percent for those that earn over $500,000 for individual filers and over $1M for those filing together.

Connecticut has a 6.35 percent average on local and state sales tax with an average property tax of $2,114 for every $100K that the house is worth.

While the state does not have an inheritance tax, it does have an estate tax.

Connecticut is one of the worst states when it comes to taxes, even with their income tax loosening up a little. Those that have a federal adjusted gross income of over $75K for individual filers and $100K for joint filers, only 25 percent of Social Social Security benefits taxed federally are taxed by the state. Those that receive below those income limits are exempt from being taxed on their social security payments. Just this year, it was implemented that 14 percent of earnings from an annuity or pension is not liable to taxes for those that have a federal AGI of less than the $75K or $100K mentioned above. The percentage for exemption will go up by 14 percent every year until 2025 when the exemption will be at 100 percent.

At this time, military pensions are exempt from state taxes.

The Constitution State comes in at fourth when it comes to the highest property taxes in the country. The average property tax on a $400K house is about $8,456 annually. Those that are 65 years of age or older and meet a limited income amount up to $36K for single filers and $43,900 for married couples can receive tax credits on property. The credits can be up to $1K for singles and $1,250 for joint filers.

The average sales tax is 6.35 percent without any local sales taxes in the state. Jewelry that is priced more than $K and clothing apparel, accessories, and shoes that cost more than $1K, along with motorized vehicles that cost $50K or more are taxed at 7.75 percent.

Connecticut applies an estate tax on properties that are worth $3.6M or more anywhere from 7.2 percent to 12 percent. It is also the only state that has a gift tax on tangible personal property in the state of Connecticut. The gift tax also applies to intangible personal property anywhere else for its citizens. The tax only applies to the amount received since 2005 and anything over the worth of $3.6M. The rates as to which these items are taxed can begin at 7.8 percent and cap to 12 percent.

Nebraska

Nebraska charges 2.46 percent on taxable earnings of up to $3,230 or less for individual filers and up to $6,440 for joint filers. 6.84 percent will be taxed on income over $31,160 and $62,320 for single and joint filers, respectively.

The average combined sales tax of local and state is 6.88 percent, with property taxes averaging $2,855 for every $100K the home is worth.

The state does not have an estate tax, but it does impose a tax on inheritance.

Those figures don’t really sound as bad as some of the states listed beforehand, so why is Nebraska number one on the list when it comes to the worst state taxes in the country, especially for those that are retiring or are already retired? Mainly because they have very high property and income taxes, the state taxes a portion of your Social Security benefits, and a majority of your other retirement income streams, such as your traditional IRA distributions, 401(k) withdrawals, and pensions that are both public and private.

If a citizen’s federal AGI is $43K or under for single filers and $58K if filing jointly, they can deduct the Social Security earnings that calculated in the federal adjusted gross income. But if their earnings are over the income threshold, their Social Security payments are taxed fully by the state as such is done federally.

The top income rate is applied for taxable earnings over $31,160 for singles and over $62,320 for those that are filing together.

The average property tax in the Cornhusker’s State is quite elevated. For Jerry and Erika, they would have to pay the state about $7,421 for their $400K house. That average makes them number 8 for the highest property tax in the U.S.

5.5 percent is that state sales tax rate, but local government can apply an extra 2 percent to that. The combined local and state sales tax comes in at 6.88 percent, which is along with the country’s average. Nebraska does not tax food and prescription medicine.

The state charges inheritance tax anywhere from 1 percent to 18 percent. Immediate relatives that are heirs are taxed 1 percent, but property under $40,000 is exempt from this tax. Remote relatives will receive a tax of 13 percent for assets worth more than $15K. Other people that are heirs will be liable to an 18 percent tax on inheritances valued at $10K or more.

The rankings were determined by measuring the tax burden between all the states and D.C.

Information on income tax was taken from the tax agency of each state and the Tax Foundations’ State Individual Income Tax Rates and Brackets for 2019.

In regards to property tax, the figures of what the average property tax would be and home value of every state came from the 2017 U.S. Census American Community Survey, the latest survey accessible. The ratio that was used was what the mean was for taxes paid for every $100K that the property was worth.

Sales tax information was taken from the tax agency of every state along with the average sale tax information from the Tax Foundation, which is based on a population measurement to calculate the average of local sales taxes.

Inheritance tax information, as well as gift taxes, were reviewed with the tax agency of each state.

To determine the rankings of the list, what made the state worse in regards to taxes was based on the income amount and sales and property tax owed by Jerry and Erika.

To calculate their income tax, the married couple had returns with different income retirement income streams. To see what they were specifically, see below:

Jerry has $30K in Social Security, $40K in IRA distributions, and $24K from a private pension.

Erika has $10,600 in Social Security, $5K in taxable dividends, $2,700 in taxable interest, $2,700 in municipal-bond interest, and $5K in capital gains.

Jerry and Erika have a $10K deductible in medical costs and a $3K deduction from mortgage interest. They also claimed a standard deduction on their federal return, but if it was more beneficial in some states for them to itemize, that was done.

Because there are states that have local income taxes, each 2018 return was determined by using Credit Karma’s tax software.

What Jerry and Erika paid for each state in property taxes was determined by having property worth $400K and what the state’s average tax rate was.

What they paid in sales taxes was determined by using the Sales Tax Calculator by the Internal Revenue Service that provides the local rates by location/zip code. Zipcodes that were used were from Zillow with properties that were in the range of the $400K amount.