The 6 Least Tax-Friendly States for Seniors

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March 15, 2023 amie-clark Author: Amie Clark | March 15, 2023
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Hawaii Connecticut Maryland New York Kansas New Jersey

When retiring, most people draw from a variety of income sources, including pensions, 401(k)s, IRAs, Social Security benefits, and other private or public funds. Unfortunately, many states tax these income sources, making it essential to consider how much tax is levied in your area.

Worst Retirement States

You may prefer to choose your retirement living situation based on the climate or local attractions, but state tax laws should also factor into your decision. You should consider not only income tax, but also estate taxes and the overall cost of living.

Based on these factors, we’ve created a list of the states that are the least financially friendly for seniors. All of these states possess their own unique appeal, but each will also dig heavily into your retirement savings.

Worried you don’t have enough money for retirement? Read our guide: How Much Do You Need to Retire?

Hawaii

Waikiki view from Diamond Head - Oahu, Hawaii (image courtesy of Cristo Vlahos via Wikimedia Commons)
Waikiki view from Diamond Head – Oahu, Hawaii (image courtesy of Cristo Vlahos via Wikimedia Commons)

Many older Americans turn to the white sand and cerulean sea heaven of Hawaii for their retirement plans. The state has a graduated income-tax system, however, which means the more you make, the more you will be taxed (up to 11 percent).

On the plus side, Hawaii exempts Social Security and public pension income from taxation. Private pensions and retirement income such as 401(k)s and IRAs, however, are fully taxed. The more private your retirement income, the less tax-friendly Hawaii will be.

Coupled with housing costs that are 222 percent higher than the national average and a huge estate tax of up to 20 percent, retiring to Hawaii can be a huge expense.

Hawaii State Tax Rates

  • State income tax: 1.4 percent to 11 percent
  • Median property tax: 0.31 percent
  • Estate tax: 10 percent to 20 percent

Connecticut

Greenwich Municipal Center Historic District, Connecticut (image courtesy of Kenneth C. Zirkel via Wikimedia Commons)
Greenwich Municipal Center Historic District, Connecticut (image courtesy of Kenneth C. Zirkel via Wikimedia Commons)

Connecticut is the charming center of the Northeastern states, encased in beautiful East Coast beaches and covered in a network of nature reserves. It is also an aggressive tax state for retirees.

Social Security income is taxed at 25 percent, the estate tax is 12 percent, and the state levies the third-highest property tax in the country at 1.76 percent. Pension income has recently become tax-exempt for seniors with less than $75,000 of annual income ($100,000 for joint filers). The same goes for IRA accounts up to 25 percent.

Connecticut’s tax exemptions for retirees have increased in the past few years, so the state may get off this list eventually despite its sky-high property taxes and moderately high cost of living, which is 22 percent higher than the national average.

Connecticut State Tax Rates

  • State income tax: 3 percent to 6.99 percent
  • Median property tax: 1.76 percent
  • Estate tax: 12 percent

Maryland

Downtown Annapolis (image courtesy of Flickr user high limitzz)
Downtown Annapolis (image courtesy of Flickr user high limitzz)

The crab cake capital of the U.S. features historic Baltimore and Annapolis, a wealth of beautiful natural parks, and architecture dating back to the founding of the country. Maryland is a friendly tax state for retirees in the sense that Social Security benefits and 401(k) accounts are tax exempt, which is why it doesn’t often feature on lists like these.

People with IRA income over $34,300, other retirement accounts, or a public pension, however, will pay far more. A potentially grueling estate tax of up to 10 percent means you may want to stay clear of “Little America.”

Maryland State Taxes

  • State income tax: 2 percent to 5.75 percent
  • Median property tax: 1.04 percent
  • Estate tax: 0.9 percent to 10 percent

New York

New York City's Times Square (image courtesy of chensiyuan via Wikimedia Commons)
New York City’s Times Square (image courtesy of chensiyuan via Wikimedia Commons)

Retiring to the Big Apple may feel like making your permanent residence a movie set, but living in New York comes at a cost. Any annual income over $20,000 from private retirement plans, including an IRA, pension plan, or 401(k), could be taxed up to the state income tax maximum of 10.9 percent.

Additionally, New York property taxes are the sixth highest in the nation. Its combined local and state sales taxes rank 10th, at 8.52 percent. Housing costs are also a staggering 258 percent of the national average, which may make it difficult to even buy a house there. Thankfully, Social Security benefits, federal pensions, and military retirement plans are tax exempt.

New York State Taxes

  • State income tax: 4 percent to 10.9 percent
  • Median property tax: 1.38 percent
  • Estate tax: 3.06 to 16 percent

Kansas

Miners Memorial in Pittsburg, Kansas (image courtesy of Sarah Runyon via Wikimedia Commons)
Miners Memorial in Pittsburg, Kansas (image courtesy of Sarah Runyon via Wikimedia Commons)

The rolling lands of Kansas sit in the heart of the United States, within easy distance of some of the most hospitable cities in the country. Some of that goodwill carries over to the state’s tax laws, which exempt in-state public pensions, federal pensions, and military pensions from taxation.

Private retirement funds are fully taxed, however, including 401(k)s, IRAs, and out-of-state public pensions. At 8.71 percent, its local sales tax is also the ninth highest in the country. Kansas is also 13th in the nation in property-tax rate, which makes it a bit less hospitable to buy there than to visit.

Kansas State Taxes

  • State income tax: 3.1 percent to 5.7 percent
  • Median property tax: 1.32 percent
  • Estate tax: None

New Jersey

Downtown Jersey City (image courtesy of Charles Smith via Wikimedia Commons)
Downtown Jersey City (image courtesy of Charles Smith via Wikimedia Commons)

Home to Ellis Island and Atlantic City — the Las Vegas of the East — New Jersey is a popular destination if busy nightlife is your cup of tea. The good news for retirees is that even though retirement income is taxed, deductions are available for most income sources, including retirement accounts, private pensions, and IRAs.

The sticking point will be the huge estate tax and the highest property tax in the country (2.21 percent). That means seniors with specific sources of public income may be able to retire to New Jersey without paying for it, while those who plan to purchase property there will be greeted with some of the highest overhead costs in the country.

New Jersey State Taxes

  • State income tax: 1.4 percent to 10.75 percent
  • Median property tax: 2.21 percent
  • Estate tax: 11 percent to 16 percent

Bottom Line

You probably know how important it is to plan your retirement with location in mind, but you may not have considered how heavily taxes can play into that choice. Some states on this list could cost you significantly more in taxes than you are willing to pay, and depending on their property taxes, you may not even be able to move there. Use the information in this guide to begin shopping for your new dream home with these all-important state tax rates in mind.

To help you in your search, we’ve also created a list of states that won’t tax your retirement income.