This article explores 11 states that have recently implemented tax changes favoring retirees, including the elimination of taxes on social security benefits and retirement income. These changes can significantly impact retirement planning and relocation decisions for retirees. The states discussed include Missouri, Kansas, Nebraska, West Virginia, Colorado, Michigan, Iowa, Mississippi, New Hampshire, North Dakota, and Wisconsin, each offering unique benefits that enhance their retiree-friendship
Over the past few years, significant changes to state tax systems have emerged, many of which favor retirees. From new deductions and expanded property tax exemptions to the full elimination of taxes on social security, the landscape is shifting rapidly. For retirees considering relocation or spending part of the year in another state, these changes can have substantial planning implications. This article covers 11 states that have made meaningful tax changes since 2023 and what these changes could mean for your retirement income.
When discussing state tax implications, many people immediately think of state income tax. While states with low or no income tax often appear on lists of retiree-friendly states, focusing solely on income tax presents a narrow view. Every state needs to collect revenue, and if they are not taxing income, they often compensate through higher property taxes, sales taxes, or other fees. Therefore, the most affordable state for one retiree may differ significantly for another, depending on their financial situation.
For instance, retirees living in high property tax states with substantial wealth tied up in their homes may find that annual property costs outweigh any savings from lower income taxes. Thus, the concept of a retiree-friendly state is highly personal and nuanced.
This article focuses on 11 states that have made quiet but impactful changes in favor of retirees. These changes are essential for those already living in these states, considering relocation, or owning second homes. Many states follow a version of the 183-day rule, meaning if you spend more than half the year in a state, you can claim tax residency there. Understanding these rules can lead to significant tax savings.
Starting in 2024, Missouri, Kansas, and Nebraska will fully eliminate their state tax on social security benefits. These states, which are not typically low-tax states, have moderately high income tax rates. Removing the tax on social security represents a meaningful shift for retirees in these states.
West Virginia is taking a phased approach to social security taxation. In 2024, 35% of social security benefits will be exempt, increasing to 65% in 2025, and fully exempt by 2026. This gradual change provides relief for retirees in the state.
Colorado has made several recent changes benefiting retirees. The state employs a flat income tax system, which has been gradually reduced from 4.4% to a potential 4% if certain revenue targets are met. Additionally, Colorado offers a retirement income deduction for residents aged 55 and older, which includes income from pensions, IRA withdrawals, and 401(k)s. For those over 65, the deduction increases significantly, allowing married couples to deduct up to $48,000 in retirement income from their taxable income. Furthermore, retirees aged 65 and older can fully deduct federally taxed social security benefits from their state return, making Colorado a favorable tax environment for retirees.
Michigan has been increasing its retirement income deduction since 2023. By 2026, retirees will be able to deduct over $65,000 for individuals and more than $130,000 for joint filers from their taxable income. This change, combined with the fact that Michigan does not tax social security, makes it one of the most affordable states for retirees, especially those with traditional retirement income.
Iowa has made one of the most straightforward retirement tax changes by fully exempting all retirement income for residents aged 55 and older starting in 2023. This change simplifies the tax code and makes Iowa more attractive for retirees. Additionally, Iowa is lowering its income tax rates, currently at a flat rate of 3.8%, down from progressive rates that once topped 8.5%.
Mississippi has long been known as a tax-friendly state for retirees, as it fully excludes retirement income from state income tax. The state is also lowering its flat income tax rate from 4.4% to 4% by 2026, with a long-term goal of phasing it down to 0%. Furthermore, starting July 1, 2025, the sales tax on groceries will decrease from 7% to 5%, benefiting fixed-income households. The homestead exemption for property taxes is also expanding, potentially eliminating property tax for homes valued around $125,000 for retirees.
New Hampshire stands out in the New England region, known for higher taxes. Starting in 2025, the state will eliminate its tax on dividends and interest income, resulting in a 0% state income tax, 0% sales tax, and 0% estate or inheritance tax. This makes New Hampshire a regional tax haven for retirees.
Beginning in 2025, North Dakota will offer an increased property tax credit of $1,600 per household, applicable to all primary residents, including retirees and pre-retirees. This change aims to provide financial relief for homeowners.
Wisconsin has introduced a retirement-friendly change starting in 2025, allowing tax filers aged 67 and older to exclude up to $24,000 for single filers or $48,000 for joint filers in retirement income from state taxation. This new rule comes with no income restrictions, a significant improvement over the previous system. Additionally, Wisconsin is adjusting its tax brackets and eliminating sales tax on electricity, enhancing the quality of life for retirees.
While taxes are an important consideration, the best state for retirement may not solely depend on tax structures. Factors such as climate, healthcare access, proximity to family, community, recreational opportunities, and overall affordability play crucial roles in determining the right retirement destination.
If you already reside in a state that supports your desired lifestyle, that is fantastic. However, if you are open to relocating or establishing residency in a second home, the tax changes discussed may influence your decision. A successful retirement plan aligns your income, values, and lifestyle, ensuring a fulfilling and financially sound retirement.
In summary, understanding these tax changes can help retirees keep more of their savings and make informed decisions about their future.
