What states don't tax social security and pensions?

Over 40 states offer some level of tax relief on Social Security benefits, but only a select few states completely eliminate income tax on both Social Security and pensions. For seniors planning their retirement, understanding which states don't tax social security and pensions is a critical step toward maximizing their savings and securing their financial future.

Quick Summary

Several states impose no state income tax at all, making all retirement income, including Social Security and pensions, completely tax-free. Other states with an income tax offer specific exemptions for these types of retirement income, allowing seniors to keep more of their earnings and enjoy a more financially secure retirement.

Key Points

• Nine States Have No Income Tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax, making all retirement income exempt.

• Specific Exemptions Exist: Several states with an income tax, such as Illinois, Iowa, Mississippi, and Pennsylvania, offer specific exemptions that ensure Social Security and pension income is not taxed.

• Social Security is Mostly Tax-Free: The vast majority of states do not tax Social Security benefits, though a handful still do, sometimes with income-based thresholds.

• Watch Out for Other Taxes: States without an income tax often rely on higher sales, property, or excise taxes to fund services. It's crucial to evaluate the complete tax picture before relocating.

• Residency Requirements Matter: To claim tax benefits, you must establish legal residency in that state, which usually requires living there for at least half the year.

Understanding State Taxes on Retirement Income

When planning for retirement, taxes can significantly impact your budget. While federal taxes on Social Security and retirement account withdrawals are a concern for many, state income tax policies vary dramatically and can offer a pleasant surprise or an unwanted shock. By exploring which states don't tax social security and pensions, retirees can make informed decisions about where to spend their golden years.

States with No Income Tax

These nine states offer the most straightforward approach, as the absence of a state income tax means no state-level taxation on any retirement income, including Social Security benefits and pension payments.

• Alaska: Not only is there no income tax, but residents may also receive an annual dividend from the Alaska Permanent Fund.
• Florida: Famous for its warm weather and no state income tax, Florida remains a top destination for retirees.
• Nevada: With no income tax and low property taxes, Nevada can be very attractive for retirees.
• New Hampshire: While it did tax interest and dividends until 2025, New Hampshire has no state income tax on wages, pensions, or Social Security. It does, however, have high property taxes.
• South Dakota: This state boasts no income tax and relatively low property and sales taxes, though some localities have their own rates.
• Tennessee: Known for its low overall tax burden, Tennessee has no income tax on wages or retirement income.
• Texas: Offering no income tax, Texas can be appealing, but it is known for having higher property taxes in some areas.
• Washington: The Evergreen State has no income tax, though it does have a high state sales tax.
• Wyoming: With no income tax and low sales and property tax rates, Wyoming offers a favorable tax environment.

States with Specific Retirement Income Exemptions

Several other states with a state income tax provide specific exemptions or deductions that ensure your Social Security and pension income remains untaxed.

• Alabama: Exempts all pension income from state income tax, in addition to not taxing Social Security.
• Hawaii: Does not tax pension income from employer contributions.
• Illinois: This state exempts all retirement income from state taxation, including Social Security, pensions, 401(k)s, and IRAs.
• Iowa: As of 2023, retirees aged 55 or older are not taxed on retirement income.
• Mississippi: Exempts all retirement income, including pensions, Social Security, and 401(k)/IRA distributions.
• Pennsylvania: Social Security, pensions, and 401(k) withdrawals for those of retirement age are not taxed.

States with Taxable Social Security and Nuances

While most states don't tax Social Security, a small number do. The rules and thresholds vary by state, so it’s crucial to understand the specifics. Some states, like Colorado, Connecticut, and Minnesota, only tax benefits above a certain income level. Others, such as West Virginia, are in the process of phasing out the tax. It’s important to research the current laws for any specific state you are considering, as tax laws can change.

Comparison Table: Tax-Friendly vs. Selective Exemptions

Navigating the retirement tax landscape requires looking at the full picture. The following table compares states that are entirely income-tax-free with those that offer strong exemptions for retirement income.

State	Income Tax?	SS Tax?	Pension Tax?	Sales Tax?	Property Tax (relative)	Note(s)
Alaska	No	No	No	No (some local)	Low-Medium	No income or statewide sales tax.
Florida	No	No	No	Yes	Low-Medium	No income tax, popular retirement destination.
Nevada	No	No	No	Yes	Low	No income tax, lower property taxes.
Wyoming	No	No	No	Yes	Low	No income tax, low property taxes.
Tennessee	No	No	No	Yes (high)	Low	No income tax, but high sales tax.
Illinois	Yes (Flat)	No	No	Yes (high)	High	Exempts all retirement income.
Iowa	Yes	No	No (over 55)	Yes	Medium	Exempts retirement income for those over 55.
Pennsylvania	Yes (Flat)	No	No	Yes	Medium	Exempts retirement income for those of age.
Mississippi	Yes (Gradual Elim.)	No	No	Yes	Low	Exempts all retirement income; income tax is phasing out.

More Than Just Income Taxes

Choosing a retirement location is about more than just income taxes. As many tax-free states need revenue from other sources, they may compensate with higher sales, property, or excise taxes. For example, New Hampshire has no sales tax or income tax, but property taxes are among the highest in the country. Conversely, Tennessee has no income tax but has a high sales tax. Factors like overall cost of living, healthcare access, proximity to family, and desired climate also play a crucial role in deciding where to retire.

The Financial Implications of Relocation

Deciding to relocate can have profound financial effects. A lower tax burden can mean thousands of dollars in extra income each year, which can be reinvested or used to improve your quality of life. Conversely, higher property or sales taxes could offset any income tax savings. It is essential to perform a thorough cost-benefit analysis before making a final decision. Consulting a financial advisor who specializes in retirement planning can provide personalized insights into how a move might affect your financial picture. For up-to-date state tax information, resources like Investopedia's analysis can be helpful: The Best Tax-Friendly States for Retirees.

Conclusion

For those wondering what states don't tax social security and pensions?, the answer is nuanced but promising. From the states with no income tax to those with specific retirement income exemptions, there are numerous tax-friendly options available. By carefully considering all tax implications, along with other lifestyle factors, retirees can choose a location that allows their retirement savings to go further and ensures a financially comfortable and secure retirement.

Frequently Asked Questions

Which states have no income tax and don't tax any retirement income?

The nine states with no state income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In these states, no state-level tax is applied to your Social Security, pension, or 401(k)/IRA withdrawals.

Are Social Security benefits ever taxed by states?

Yes, but only in a minority of states. A small number of states, including Colorado, Connecticut, Minnesota, Montana, and others, do tax Social Security benefits, often based on income level. Most states, however, do not.

What is the catch with states that have no income tax?

The primary 'catch' is that these states need to generate revenue from other sources. This often results in higher sales taxes (like in Washington or Tennessee) or higher property taxes (like in New Hampshire or Texas), which could potentially offset income tax savings.

Do military pensions get taxed differently?

The taxation of military retirement income varies by state. Many states offer full or partial exemptions for military pensions. For example, states without an income tax do not tax military pensions, and some states with income tax, like Illinois and Pennsylvania, also exempt them.

What other taxes should I consider besides income and retirement taxes?

When choosing a retirement location, you should also evaluate state and local sales taxes, property taxes, excise taxes on items like gasoline, and whether the state has an estate or inheritance tax.

How can I find out the specific tax laws for a state I'm considering?

The most reliable way is to visit the official Department of Revenue website for that state. Tax laws are subject to change, so consulting the official source is the best way to get the most current information.

Is it possible to have dual residency and take advantage of tax laws?

Dual residency is possible, but it's a complex area of tax law. The state where you claim residency (domicile) will tax your income, and another state can tax income from sources within its borders. It's best to consult a tax advisor to navigate dual residency rules.