Which States Are the Most Tax-Friendly for Retirees?

State-Specific Retirement | by Jules Buxbaum | Monday, February 10, 2025

Are you retired or thinking about retirement soon? You might be wondering how different states handle income, property, and sales taxes—and how that mix can affect your bottom line.

In fact, identifying the **tax-friendly states for retirees** can lead to big savings over time. If you want a quick look at how certain popular regions handle retirement-related taxes, check out our detailed guide on state-specific tax benefits for retirees.

Why State Taxes Matter for Retirees

Once your working years wind down, every dollar counts. High tax bills can reduce your retirement lifestyle, so it's smart to look at states offering lower taxes. From **best states to retire for taxes** to more nuanced places with partial exemptions, the variety is huge.

Measuring a state's tax friendliness calls for looking beyond just income tax. Property tax, sales tax, and estate or inheritance taxes all influence your net retirement income. According to the Tax Foundation (2023), states with no income tax may rely more on property or sales taxes, which can still affect older adults.

Important Types of Retirement Taxes

People often focus on state income tax, but there are three main categories to keep in mind. Each works differently:

Income Tax: Some states don’t tax retirement income at all, while others tax Social Security or 401(k) distributions.
Property Tax: Rates vary widely. A homestead exemption or special break for seniors can make a difference.
Sales Tax: A high combined state and local rate can quickly add up, especially on everyday purchases.

Additionally, **estate and inheritance taxes** may impact how you transfer wealth to your heirs. As of 2025, 17 states plus Washington D.C. still impose some form of estate or inheritance tax (Thomson Reuters, 2024). If you plan to pass sizeable assets to family, these rules matter.

Seven States With No Income Tax

For decades, retirees have looked to places that charge no state income tax. Currently, seven states fit the bill: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. By 2025, New Hampshire will join them, formally ending its tax on dividends and interest.

Florida is a favorite, thanks to no income tax plus no estate or inheritance tax. Beyond the sunshine, older adults can reduce property taxes through a homestead exemption. Nevada offers similar benefits, though sales taxes tend to be relatively high.

Before you move to a no-income-tax state, evaluate cost of living. For instance, Alaska has sky-high heating and grocery expenses despite no state income or sales tax. Texas counters its lack of income tax with higher property taxes.

As of 2024, 38 states do not tax Social Security benefits, according to SmartAsset (2024). This can be game-changing if Social Security comprises most of your retirement income. Meanwhile, 12 states tax Social Security at varying thresholds. For example, Colorado and Kansas levy taxes based on total income, while Utah provides a retirement income credit that partially offsets these taxes.

If your budget counts heavily on Social Security, a state that fully exempts these benefits may help you keep more of your money. For deeper insight on how these taxes play out, see our piece on how each state treats Social Security benefits for retirees.

Other Noteworthy Tax-Friendly States

Some states remain budget-friendly even if they tax certain forms of retirement income. Here are a few to watch:

Pennsylvania: Exempts all retirement distributions (pensions, 401(k)s, IRAs, and Social Security) from state tax. It does levy a flat 3.07% tax on earned income, so partial retirees might pay on wages.
Illinois: Exempts most retirement income. According to Kiplinger (2024), older residents who rely on pensions or Social Security may pay minimal state taxes.
Delaware: No state or local sales tax, lower property taxes than many other regions, and no tax on Social Security benefits. Though property values have been rising, it remains a strong tax choice.
Iowa: Will soon drop to a flat tax rate of 3.8% and is moving toward exempting retirement income for many older adults. The state also eliminated its inheritance tax.

In addition, states like North Carolina are whittling down their income tax each year—expected to hit 3.99% by 2027—which may appeal to retirees wanting milder winters without heading all the way south to Florida.

Balancing Cost of Living and Healthcare

Tax breaks alone don't paint the full picture. Some states with minimal taxes have higher healthcare expenses or overall living costs. For instance, Nevada might look promising on paper, but retirement communities can be expensive in booming cities like Las Vegas.

Meanwhile, Florida stands out with dedicated healthcare facilities for seniors, but home prices have spiked in popular retirement locales. A mid-range property can easily surpass $400,000 in areas like Naples or Sarasota (Morningstar, 2023). If you’d like to see how taxes and living costs compare for certain popular regions, explore our article on the best places to retire in NY, NC, and FL based on taxes & cost of living.

How 2Pi’s Approach Helps You Evaluate Tax-Friendly States

At 2Pi Financial, we believe your total retirement setup involves more than just turning down equity risk as you age. Historically, **stocks have outperformed other asset classes** (Equity Risk Premium research), so we often recommend higher ownership of equities for many individuals—unless your wealth is already so large you can afford very low returns.

We challenge the idea of automatically lowering equity exposure with age. Instead, we look at how future earnings compare with your existing wealth. A person who keeps part-time income streams into their 70s might handle market swings better, while someone with no additional earnings may need a different plan.

While taxes are significant, so is your portfolio’s growth potential. Our analytics help you see how different scenarios—like moving to Florida or staying in Pennsylvania—might affect your net returns. Interested in a personalized simulation? Our Two Pi's Financial Planning Engine walks you through adjusting retirement age, savings levels, and more. It calculates how your money might last across various market and tax conditions.

Key Takeaway

The **most tax-friendly states for retirees** share common perks: no (or low) taxes on Social Security, moderate property taxes, and strategic exemptions for retirement income. Yet a place with a favorable tax code might have a higher cost of living, which reduces any savings advantage.

Ultimately, picking the best state for your retirement is about balancing tax burden, healthcare accessibility, lifestyle, and potential equity growth. If you’re ready to explore more ways to minimize the toll taxes can have on your nest egg, visit our resource on how to minimize taxes on your retirement income. Considering the bigger picture helps you find a location that truly fits your future.

References

Kiplinger. (2024). “State-by-State Guide to Taxes on Retirees.” Available at: https://www.kiplinger.com/retirement/600892/state-by-state-guide-to-taxes-on-retirees

Tax Foundation. (2023). “2025 State Tax Competitiveness Index.” Available at: https://taxfoundation.org/research/all/state/2025-state-tax-competitiveness-index/

Thomson Reuters. (2024). “The Accountant’s Guide to State Taxes on Retirement Income.” Available at: https://tax.thomsonreuters.com/blog/the-accountants-guide-to-state-taxes-on-retirement-income/