How much disposable income will you have to retire on after taxes? That’s not just federal taxes, but state income taxes, sales taxes, property taxes, and state inheritance or estate tax as well. If retirement is rolling up fast and you are in the market for some new horizons, why not consider moving to a state that will leave more money in your wallet?

Kiplinger, along with CCH (a leading provider of tax information and software) and the Tax Foundation, a not-for-profit organization located in Washington DC, took a look at how states compare when it comes to taxing retirees. Here are the 10 states that will tax you the least, and leave you the most spending money.

Every state on this list is considered a tax haven because each one exempts your Social Security benefits from taxation, and some charge little or no state income tax on your other income. Some also exempt military and government pensions, and some also exempt private pensions. A few give exclusions up to a dollar amount of retirement income from a variety of sources. If you have income from IRAs and 401(k) plans, as opposed to a traditional pension, this exclusion will be important. So take a look at your sources of income, and compare that to this list. Depending on where you live now, the lure of lower taxes and more spending money just may cause you to hitch up the old wagon and move on to greener pastures.

Keep in mind these are based on the tax rates in force at the end of 2012. Some rates changed slightly with the new year.

1. Alaska, the Last Frontier State. The Tax Foundation says, “Alaskans are consistently the least taxed residents in the nation,” thus they made the number one spot on the list.

• No state tax.
• Permanent residents who have lived there at least one year receive an annual dividend from the state’s oil reserves. In 2012 each resident received $878 – the lowest dividend in many years. The year before was $1,174.
• No statewide sales tax, those some localities do charge a sales tax of an average of 2%.
• Caveat! Real estate and home prices can be high, though homeowners who are 65 and up are exempt from municipal taxes on the first $150,000 of assessed value of their home.

2. Nevada, the Silver State.

• Nevada has no state tax. Much of the tax burden is shifted to gamblers and tourists.
• Caveat! State sales tax is 6.85%. In some areas, local tax that is also charged can push sales tax up to 8%, which is higher than average.
• No state estate or inheritance tax.
• Property tax is reasonable, assessed on about 35% of the home’s appraised value. On a house that is worth $100,000 you’ll pay about $1,050 per year.

3. Wyoming the Equality State.

• No state income tax. Abundant oil and mineral revenue help keep overall taxes low.
• State sales tax is 4%. In some areas counties add up to 2%, which is still one of the lowest combined sales tax rates in the U.S. Prescription drugs and groceries are not subject to sales tax.
• For residential property tax, only 9.5% of the assessed market value is subject to property tax.
  
  On a home worth $100,000 a typical annual property tax bill is about $760.

4. Mississippi, the Magnolia State.

• Retirement income is exempt, including pensions, annuities, IRAs and 401(k) distributions (only one other state – Pennsylvania – exempts all retirement income).
• Non-retirement income is taxed at 3% to 5%.
• State sales tax is 7%.
• No state estate or inheritance tax.
• Property taxes are below the national average, according to the Minnesota Taxpayers Association’s annual 50 state comparison. Single family homes are taxed at only 10% of the appraised value, about $1,070 per $100,000 of the home’s market value. For residents age 65 and older, the first $75,000 is exempt from property tax.

5. Georgia, the Peach State.

• State income tax is 1% to 6%. Taxpayers 62 to 64 can exclude up to $35,000 per person, $70,000 for a couple. Residents at least 65 years old could exclude up to $65,000 of retirement income ($130,000 for a couple) in 2012. This includes interest, dividends, capital gains, net income from rental properties, pensions, annuities and up to $4,000 of earned income.
• Caveat! This is on the higher side in some areas. Statewide sales tax is 4%, but local tax authorities can add another 4%. Food and prescription drugs and exempt.
• Property tax is close to national average, but higher than in some of the neighboring southern states.

6. Alabama, the Yellowhammer State.

• State tax rates start at 2% and top out at 5%. Social Security benefits, military, public and private pensions are excluded from this tax. IRA distributions, 401(k) distributions, and similar defined-contribution retirement plans are not exempt.
• Sales tax is 4% statewide, but cities and counties can impose their own taxes, and in some places it reaches 10%, among the highest in the nation. Food is taxed, but prescription drugs are not.
• No state estate and inheritance tax.
• Property tax is some of the lowest in the United States.

7. South Carolina, the Palmetto State.

• Social Security benefits are exempt from state tax, and residents age 65 and up can deduct up to $15,000 per person ($30,000 for a couple) of retirement income regardless of source. Retirees who are under 65 can exclude from taxable income up to $3,000 of retirement income from taxation, including public and private pensions and IRA distributions.
• Property taxes are low, based on 4% of the home’s market value. Homeowners 65 and up can qualify for a $50,000 exemption. Older homeowners are also exempt from school taxes on their properties.
• Caveat! Sales tax can be high. Statewide it is 6% and localities can add up to another 3%. Prescription drugs are exempt from sales tax and food is not exempt.

• State income tax is 2% to 6%, but retirees can exclude from taxable income Social Security, military, civil service, state and local pensions from taxable state income. In addition, they can claim up to $6,000 per person of pension and annuity income. Personal income tax rates in Louisiana max out at 6% on taxable income of $50,000
• The Tax Foundation reports that property taxes here are among the lowest in the nation.

9. Delaware, the “First State.”

• State income tax is modest, 2.2% to 6.75%. Social Security benefits are exempt from income taxes, and residents age 60 and up can exclude from state taxable income $12,500 per person of qualified pension benefits and investment income (including dividends, interest, and capital gains). Income tax rates top out at the highest rate of 6.75% for individuals and married couples. For taxpayers who do not itemize, those 65 and older may also take an additional standard deduction of $2,500.
• Real estate taxes are generally low, though they vary by county. Homeowners age 65 and up can get up to a $500 credit against school taxes.

10. Pennsylvania, the Keystone State.

• State income tax is 3.07% on non-retirement income. So if you have a part-time job, the tax is very low. Like Mississippi, Pennsylvania exempts all retirement income from state tax.
• State sales tax is 6%, but food, clothing, and medicines are exempt.
• Property tax can be high, especially close to the big cities.
• Caveat! Pennsylvania is one of only a few states that charge a state inheritance tax, paid by heirs.

The Ten Least Tax-Friendly States for Retirees

Some of these are probably predictable, while a few may come as a surprise. When it comes
to taxes, rural and less populated does not always mean lower cost. Keep in mind these are based on the tax rates in force at the end of 2012. Some rates changed slightly with the new year.

1. Connecticut

2. Vermont

3. Rhode Island

4. Montana

5. Minnesota

6. Nebraska

7. Oregon

8. California

9. New Jersey

10. New York

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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