From Kiplinger.com
Where’s the best state for you to retire? A lot will depend on your sources of income. For retirees, while relocating to an income-tax-free state such as Florida or Texas may sound appealing, sometimes the best retirement destination is a state that imposes an income tax, but offers generous exemptions for Social Security benefits, pensions and other types of typical retirement income.
Here is our list of 10 Tax-Friendly States for Retirees. Just make sure that, before you move anywhere in retirement, you factor in local taxes, too. Municipalities can impose hefty property taxes or other assessments. Federal taxes? They’ll be about the same no matter where you live.
State Income Tax: none
State Sales Tax: none
Inheritance Tax: No
Taxes? The Last Frontier State actually gives residents money for living there, distributed from its Permanent Fund, an oil wealth savings account administered by the state. This year, every man, woman and child who has lived in Alaska for at least one year received a 2009 dividend of $1,305. There’s no income tax, no state sales tax, and only 25 municipalities even levy a property tax. Some municipalities impose local sales taxes of up to 7%, however.
State Income Tax: none
State Sales Tax: 4% (localities can tack on an extra 1%)
Inheritance Tax: No
Retirees don’t pony up much in taxes in the Cowboy State. Thanks to the abundant revenues that Wyoming collects from oil and mineral companies, residents shoulder the lowest tax burden of any state except Alaska, according to the Tax Foundation. Prescription drugs and groceries are exempt from state sales taxes. For most property, only 9.5% of market value is subject to tax, so a home worth $100,000 is taxed on $9,500 of assessed value.
State Income Tax: 4.35%
State Sales Tax: 6%
Inheritance Tax: No
The Great Lakes State offers generous retirement-income exemptions from state income tax. It does not tax Social Security or military, federal, state- or local-government pensions. Private pensions are exempt up to $45,120 for individuals and up to $90,240 for married couples filing jointly. (However, these private-pension exemptions are reduced by any public-pension deduction that you claim.) The state’s flat-rate income tax is scheduled to gradually decline to 3.9% by 2015. Food and prescription drugs are exempt from state sales taxes.
State Income Tax: 3.07%
State Sales Tax: 6% (localities can tack on an extra 2%)
Inheritance Tax: Yes
True to its Quaker roots, the Keystone State extends a friendly hand to retirees. It is one of the most generous states when it comes to offering income-tax exclusions on a wide variety of retirement income. Pennsylvania does not tax Social Security benefits or any type of public or private pensions. Nor does it nick distributions from 401(k)s, IRAs, deferred-compensation plans or other retirement accounts. Food, clothing and medicine are exempt from state sales taxes. But Pennsylvania is one of the few states that has both an inheritance tax and an estate tax.
State Income Tax: 4.63%
State Sales Tax: 2.9% (localities can add their own)
Inheritance Tax: No
If the sheer beauty of the Rocky Mountains isn’t enough to draw you to the Centennial State, its low, flat income-tax rate of 4.63% might. Taxpayers 55 to 64 years old can exclude a total of $20,000 of Social Security and qualified retirement income from state income taxes; those 65 and older can exclude up to $24,000. The state sales-tax rate is 2.9%, but local taxes can boost the combined rate to an average of about 7%. Food and prescription drugs are exempt from sales taxes.
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