It’s true that taxes fund many of the services and infrastructure we use on a daily basis in the United States, from public schools to road maintenance to health care. Taxes ensure that our communities have access to essential services. That said, it’s important to note that most people don’t like dealing with taxes, even though they’re a necessity today.
The not so positive news is that taxes will not disappear, so the sooner you accept them, the easier it will be to see them as part of life in the United States. However, the encouraging news is that retirees in certain states may find that their retirement income is tax-exempt.
Some States Do Not Impose Any Kind of Income Tax
Currently, there are nine states in the United States that do not tax any income, regardless of its source or whether you are retired:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
What About Private Retirement Saving Plans?
Whether the income comes from a job, a 401(k) plan, an individual retirement account (IRA), a pension or from Social Security, those who have retired in these nine states will not have to worry about paying any state income taxes. However, the federal tax rules will continue to apply.
A relevant note for New Hampshire residents is that interest and dividend payments over $2,400 per year are taxable, but this rule will cease to apply as of January 1, 2025.
States Where Retirement Income Is Tax-Exempt
The following four states do not tax any retirement income:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
Retirement income is considered to be income received from a 401(k) plan, an individual retirement account (IRA), or a pension. The criteria for this exemption varies depending on the state; usually, you are only required to be a certain age. For example, in Iowa, you must be at least 55 years old to qualify for the exemption.
As in states with no income tax, it is important to remember that federal tax rules still apply, so stay vigilant to avoid disgusting surprises.
Social Security is a key component in the finances of many retirees, so it cannot be overlooked. Most retirees won’t have to worry about taxes applied to their Social Security benefits, but there are nine states that haven’t eliminated them yet:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you reside in any of the states listed above, please check your state’s specific rules regarding Social Security taxes, as these may vary and change at any time.
Anyone Could Face Federal Social Security Taxes
You’ve probably already noticed the trend, but it’s worth reiterating: federal tax rules apply, regardless of state rules. To determine the amount of taxes you might be subject to, the IRS uses your “combined income,” which includes half of your annual Social Security benefits, your adjusted gross income, and any nontaxable interest you earn (such as interest on Treasuries).
