This article takes a look at the top 26 tax-friendly states for retirees in 2024. If you wish to skip our detailed analysis, you may go to Top 10 Tax Friendly States for Retirees in 2024.
Unveiling Retirement Realities
Are baby boomers financially secure? With almost all the baby boomers having reached the age of retirement, it’s quite a pertinent question to consider. The 23rd Annual Transamerica Retirement Survey, one of the largest surveys exploring the retirement outlook and healthy aging perspectives across different demographic segments, aims to shed some light on this issue. According to the survey, millions of Americans are in fact, ill-prepared for retirement, having to navigate everything between soaring inflation, the aftermath of the pandemic, economic uncertainty, and also the projected depletion of Social Security funds by 2034. Survey findings from Principal Financial Group, Inc. (NASDAQ:PFG) reveal some consequences of the same, stating how 26% of workers state they are now delaying retirement to deal with finances. As the last of the 73 million Baby Boomers turn 65 in the next decade, the retirement landscape in the States looks anything but promising.
“You’re probably going to have an increase in the poverty rate. People are retiring, some quite early, and retiring with very little. Baby boomers just don’t have enough savings. And Social Security is just not gonna be that big for lots of people.”
- Retirement planning evangelist Laurence Kotlikoff, a William Fairfield Warren Professor and a Boston University College of Arts & Sciences professor of economics.
Even though Social Security benefits aren’t meant to replace retirement income anyway, it has still been helping retirees from falling below the poverty line. The Center on Budget and Policy Priorities reports that without SS benefits, 22.7 million more adults and children would be living below the poverty line. The most important demographic that these benefits are helping are older women and people of color, they note. As such, more than 17 million Americans aged 65 and above are economically insecure, living as much as at or below 200% of the federal poverty level (FPL). As of January 2024, the average Social Security check for a retiree is $1,909. This amount is deemed insufficient when compared with the average retirement expenses of retirees which are around $4,345.
Going back to insights from the Principal Financial Group, Inc. (NASDAQ:PFG) survey, many respondents stated that they are postponing their retirement plans. However, it’s important to note that not everyone falls into this category. Some aren’t delaying retirement, but are delaying something else instead. Anything from traveling to moving and even home repairs is being deferred by retirees to deal with finances, findings state. Another interesting finding from Principal Financial Group, Inc. (NASDAQ:PFG) is that those who are delaying retirement show a 52% increase in finding debt problematic than those who don’t. These individuals also experience stress that is almost 50% higher. For those asking why, these individuals often lack financial confidence, and are more skeptical about their abilities to save and balance their emergency savings.
This brings us to the question: is delaying retirement always the right move? While it depends on your financial situation and it’s probably best to ask your financial advisor, a retirement delay may not always make more sense. In case it doesn’t and you don’t have a fat nest egg to lean on, it’s probably wise to engage in alternative solutions, such as relocating to cheaper states. Many retirees often ask us, what is the most affordable state to retire in 2024? While there isn’t one single answer, there are quite many states to retire that are best for the cost of living and taxes. These states have the best tax structure for retirees and are often complemented with a lower cost of living than the national average.
For the retirees interested, here are the top 26 tax-friendly states for retirees in 2024:
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Methodology
To come up with our list of the top 26 tax-friendly states for retirees in 2024, we went back to our list of all the states that don’t tax Social Security in 2024. Next, we selected all states that had a ranking of 5(very tax-friendly) or 4(tax-friendly). This gave us 23 states for our list. Next, we ranked all the states that were “moderately tax-friendly” for retirees on their Average Combined State sales tax, property tax, and overall tax-friendliness. This gave us three more states. All these 26 states were ranked on their overall retirement tax-friendliness, sales, and property tax rates. Tax-friendliness has been taken from our previous articles, The Average Combined State sales tax rate is from the Tax Foundation, and the average effective property tax rate is from Property Shark. States have been ranked in ascending order from the lowest to the highest scores. The cost of living index, though not considered in our ranking, has also been mentioned in our list to help readers assess which state might be better for them to retire.
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Here are all the top Tax-Friendly States for Retirees in 2024:
26. Illinois
Insider Monkey Score: 12
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 8.855%
Average Effective Property Tax Rate: 2.11%
Cost of Living Index: 92.1
Making it to our list of states that don’t tax retirement income, Illinois is a good option to consider for retirees who want exemptions on their retirement income, including Social Security, pensions, and distributions. The state does grapple with high property and sales taxes.
25. Washington
Insider Monkey Score: 16
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 9.378%
Average Effective Property Tax Rate: 0.88%
Cost of Living Index: 116
While the cost of living isn’t the most ideal in this state, Washington is considered “tax-friendly” because there is no state income tax. There are two property tax relief programs for seniors and people with disabilities.
24. Oklahoma
Insider Monkey Score: 19
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 8.989%
Average Effective Property Tax Rate: 0.85%
Cost of Living Index: 86.2
Social Security benefits aren’t taxed in Oklahoma, while there are deductions on other types of retirement income. Sales taxes are high, but property taxes and cost of living are lower than the national averages.
23. Iowa
Insider Monkey Score: 21
Combined State Sales Tax Rate: 6.94%
Average Effective Property Tax Rate: 1.49%
Tax Friendliness: Tax Friendly
Cost of Living Index: 90.3
Next up on our list of top tax-friendly states for retirees in 2024 is Iowa. There are no taxes for taxpayers aged 55 or older. The sales tax is high, but there are exemptions on groceries, prescription drugs, diapers, and some feminine hygiene products.
22. Pennsylvania
Insider Monkey Score: 24
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 6.341%
Average Effective Property Tax Rate: 1.41%
Cost of Living Index: 95.6
Pennsylvania doesn’t tax income from Social Security, as well as payments from retirement accounts, like 401(k)s and IRAs. It also exempts pension income for seniors age 60 or older. Even though sales tax is high, clothing, groceries, prescription drugs, and residential fuels are all exempt.
21. Texas
Insider Monkey Score: 24
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 6.250%
Average Effective Property Tax Rate: 1.63%
Cost of Living Index: 92.7
The state of Texas doesn’t have a state income tax; hence all retirement income goes to residents tax-free. Property taxes and sales taxes are higher than average. However, homes in Texas are below the national median and there are property tax relief programs available as well. Groceries, prescription drugs, and over-the-counter medicine are also tax-exempt.
20. Tennessee
Insider Monkey Score: 24
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 9.548%
Average Effective Property Tax Rate: 0.58%
Cost of Living Index: 90.3
Tennessee doesn’t have an income tax either, which is why it is one of the top tax-friendly states for retirees in 2024. Cost of living and property tax rates are also lower than the national average.
19. Arkansas
Insider Monkey Score: 24
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 9.480%
Average Effective Property Tax Rate: 0.59%
Cost of Living Index: 89
Arkansas is considered tax-friendly because it doesn’t tax Social Security benefits and provides deductions on other types of retirement income.
18. Louisiana
Insider Monkey Score: 26
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 9.563%
Average Effective Property Tax Rate: 0.55%
Cost of Living Index: 91
Every state has some stream where it gets its revenue from. In Louisiana, it’s sales taxes. The state does not tax Social Security retirement benefits or income from public pensions. Some retirement income is taxed, but there is an income exclusion of up to $6,000 for retirees age 65 and older.
17. Indiana
Insider Monkey Score: 28
Tax Friendliness: Moderately Tax Friendly
Average Combined State Sales Tax Rate: 7.000%
Average Effective Property Tax Rate: 0.77%
Cost of Living Index: 91
The “moderately tax-friendly” state of Indiana taxes income from pensions and retirement savings accounts. Social Security benefits aren’t taxed in the state.
16. Michigan
Insider Monkey Score: 29
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 6.000%
Average Effective Property Tax Rate: 1.35%
Cost of Living Index: 90.6
Next on our list of top tax friendly states for retirees in 2024 is Michigan. The state of Michigan does not tax Social Security retirement benefits and also provides deductions on all other types of retirement income.
15. New Hampshire
Insider Monkey Score: 31
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 0.000%
Average Effective Property Tax Rate: 1.89%
Cost of Living Index: 114.1
New Hampshire doesn’t tax social security or other retirement income, but dividends and interest are taxed for the current tax year. There is no sales tax here either.
14. North Carolina
Insider Monkey Score: 32
Tax Friendliness: Moderately Tax Friendly
Average Combined State Sales Tax Rate: 6.996%
Average Effective Property Tax Rate: 0.73%
Cost of Living Index: 95.3
While Social Security isn’t taxed in North Carolina, other forms of retirement income are taxed at the flat income tax rate of 4.75%. Property taxes and cost of living are lower than the national average.
13. Alabama
Insider Monkey Score: 34
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 9.289%
Average Effective Property Tax Rate: 0.39%
Cost of Living Index: 88.3
Social Security benefits aren’t taxed in Alabama. Beginning January 1, 2023, Governor Ivy signed HB162 into law, exempting the first $6,000 of retirement plan distributions for taxpayers age 65 or older.
12. South Carolina
Insider Monkey Score: 36
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 7.499%
Average Effective Property Tax Rate: 0.53%
Cost of Living Index: 95.3
South Carolina doesn’t tax Social Security retirement benefits, making it one of the top tax-friendly states for retirees in 2024. It also provides a $10,000 taxable income deduction on other types of retirement income.
11. Kentucky
Insider Monkey Score: 36
Tax Friendliness: Tax Friendly
Average Combined State Sales Tax Rate: 6.000%
Average Effective Property Tax Rate: 0.80%
Cost of Living Index: 92
Kentucky doesn’t tax Social Security income and also provides a significant deduction for seniors receiving other types of retirement income.
Click to continue reading and see the Top 10 Tax Friendly States for Retirees in 2024.
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Disclosure: none. Top 26 Tax Friendly States for Retirees in 2024 is originally published on Insider Monkey.