If you're starting to think of retirement, you may be looking forward to moving past the daily commute and grind that are currently part of your everyday life. Whether you want to move to a different state or are content with staying where you are, the largest expense that most people have after reaching retirement age involves income taxes. However, many states keep retirement income taxes to a minimum. If you live in a state with high retirement income taxes, making a move in the near future may be beneficial. Here's a closer look at the retirement laws in 10 states and how they differ.
Hawaii
The income tax in Hawaii is 1.4% on income of up to $4,800 for joint filers and $2,400 for individual filers. If you make more than $400,000 as a married couple or $200,000 as an individual, the tax rate on any income you make above this amount is 11%. Taxes aren't required on Social Security and most pension income.
Idaho
The Idaho income tax rate is 1% up to $3,176 of taxable income for joint filers and $1,588 for individual filers. Any taxable income above $15,878 for joint filers and $7,939 for individual filers is taxed at a rate of 6.5%. Railroad retirement benefits and Social Security benefits aren't taxed.
Illinois
Although most income from retirement plans is exempt and Social Security benefits aren't taxed, citizens of Illinois must pay a flat income tax rate of 4.95%. Property taxes are high and amount to $2,165 for every $100,000 of assessed value. A small homestead exemption of $5,000 is available.
Indiana
Indiana has a flat income tax rate of 3.23%. Even though Social Security benefits are exempt from being taxed, all private pensions and 401(k) plans are fully taxable. Counties are also able to require their own income taxes. The sales tax rate and property tax rate are somewhat reasonable but won't offset the taxes you owe.
Iowa
Iowa has a tax rate of 0.33% on income of up to $1,743 and 8.53% on income above $78,435. At $1,529 for every $100,000 of assessed value on your home, property taxes are high. Starting in 2023, retirement income becomes exempt from taxes for anyone 55 or older.
Kansas
Kansas has a 3.1% tax rate on income between $5,001-$30,000 for joint filers and $2,501-$15,000 for individual filers. The tax rate climbs to 5.7% for income above $30,000 as a single filer and $60,000 as a joint filer. Income from public pensions or private retirement plans is taxed. The same is true of Social Security benefits if your income is higher than $75,000.
Kentucky
Retirees in Kentucky are tasked with paying a flat income tax rate of 5%. Social Security benefits are exempt from state taxes. As much as $31,110 of your retirement income from annuities or public pensions can also be exempted from taxes. Kentucky does have an inheritance tax.
Louisiana
Louisiana has an income tax rate of 2% on income of $25,000 for joint filers and $12,500 for individual filers. Any income you make above $50,000 as an individual filer or $100,000 as a joint filer will be taxed at a rate of 6%. Social Security benefits and all federal, state, or local pensions are exempt from taxes.
Maine
Maine has a high income tax rate of 5.8% on income below $44,950 for joint filers and $22,450 for individual filers. This tax rate increases to 7.15% on income above $106,350 for joint filers and $53,150 for individual filers. Property tax rates are also high. Only $10,000 of pension income can be deducted.
Maryland
Maryland has an income tax rate of 2% for less than $1,000 in taxable income and 5.75% on taxable income above $250,000 for individual filers and $300,000 for joint filers. The state has an inheritance tax as well as an estate tax. If you make less than $100,000 in taxable income, you may be able to claim a $1,000 tax credit.
Choosing where to settle down once you reach retirement age is never going to be an easy decision. However, the information detailed above should help guide your decision-making process and allow you to make a fully informed decision. If you want to live in a state that doesn't tax retirement income, there are several options available to you. Since most states will tax some retirement income but avoid taxing others, you should be able to find one or more states that fit your exact situation.
Sources:
https://www.aarp.org/money/taxes/info-2020/states-that-dont-tax-retirement-distributions.html
https://smartasset.com/retirement/retirement-taxes
https://www.aarp.org/money/taxes/info-2020/states-that-dont-tax-retirement-distributions.html
