Retirement income taxes are difficult. Americans typically include only Social Security when calculating their earnings after retirement, but most people also have 401(k), individual retirement account (IRA), or pension income to consider.
Most of these additional modes of payment are subject to taxes, depending on where you live. In the United States, not every state taxes retirement income at the same rate, if at all. It is critical to understand which states are more tax favorable to relocate to, sometimes even before retirement, in order to make ends meet.
Having said that, you will always be required to pay some form of tax, whether it be sales tax (exceptions are Alaska, Delaware, Montana, New Hampshire, and Oregon) or property tax if you own a home. But if you simply want to keep the amount of money you receive each month as intact as possible, here are a few possibilities.
States that don’t have an income tax
Residents of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming will not be required to pay income taxes.
However, if you live in one of these states, you will need to be aware of some differences. Although New Hampshire does not have an income tax, it does charge taxes on dividends and interest. These taxes do not apply to dividend and interest income from an IRA or 401(k), but if you have other investments, you will need to review your profits.
There is still some good news: New Hampshire will phase out these taxes after 2024, so you won’t have to worry about them starting April. Another example is the state of Washington, which taxes capital gains and is anticipated to continue to do so after voters rejected a proposal to repeal them.
States that tax income but not retirement income
In addition to the nine states that do not tax income, Illinois, Iowa, Mississippi, and Pennsylvania do not tax retirement income, which includes funds earned from Social Security, 401(k) plans, IRAs, or pensions. Regular income continues to be taxed in these.
There are some idiosyncrasies to take into mind. For example, in Mississippi and Pennsylvania, early distributions are not recognized as retirement income and may be liable to taxes.
Alabama taxes retirement income from 401(k) plans and IRAs but not Social Security retirement benefits or pension income from a defined benefit retirement plan, providing relief to people who rely on government money or pensions to get by.
Hawaii is unique in that it does not tax any retirement distributions from private or public pension plans as long as retirees do not contribute to the plans. This also means that retirement plans with employee contributions are taxed only on the portion of increased value in the plan caused by the employee contributions.
States where Social Security isn’t taxed
The majority of states do not tax Social Security benefits, which is excellent news for most Americans, but the rest of your retirement income may be at danger. Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Virginia, and Wisconsin are the remaining states that do not tax these benefits.
These states have individual policies that imply the remainder of your retirement income is still taxed, so before you pick where you want to reside, look into what other policies a state has that may have an adverse impact on your plans.
Also See:- $300 cut in Social Security Benefits – Date already confirmed and could come sooner than expected
Leave a Reply