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10 Worst States for Taxes on Your Retirement Nest Egg

Here is a nice article provided by Sandra Block of Kiplinger:


Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes—and how generous are the property-tax breaks for seniors? Are Social Security benefits taxed? What about other forms of retirement income—including IRAs and pensions? Does the state impose its own estate tax that might subtract from your legacy? The answers might just determine which side of the state border you’ll settle on in retirement.

These 10 states impose the highest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. Three of them treat Social Security benefits just like Uncle Sam does—taxing as much as 85% of your benefits. Exemptions for other types of retirement income are limited or nonexistent. Property taxes are on the high side, too. And if that weren’t bad enough, some of these states are facing significant financial problems that could force them to raise taxes, cut services, or both.

10.  Utah:

State Income Tax: 5% flat tax

Average State and Local Sales Tax: 6.69%

Estate Tax/Inheritance Tax: No/No

The Beehive State joins our list of least tax-friendly states this year, replacing Rhode Island (which no longer taxes Social Security benefits for residents with adjusted gross income of as much as $80,000/individual, $100,000/joint).

Utah offers few tax breaks for retirees. Income from IRAs, 401(k)s, pensions and Social Security benefits is taxable at the 5% flat tax rate. The state does offer a retirement-income tax credit of as much as $450 per person ($900 for a married couple). The credit is phased out at 2.5 cents per dollar of modified adjusted gross income over $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for married people filing jointly.

On the plus side, property taxes are modest. Median property tax on the state's median home value of $223,200 is $1,480, 11th-lowest in the U.S.

9.  New York:

State Income Tax: 4.0% (on taxable income as much as $8,450/individual, $17,050/joint) – 8.82% (on taxable income greater than $1,070,350/individual, $2,140,900/joint)

Average State and Local Sales Tax: 8.49%

Estate Tax/Inheritance Tax: Yes/No

New York doesn’t tax Social Security benefits or public pensions. It also excludes as much as $20,000 for private pensions, out-of-state government pensions, IRAs and distributions from employer-sponsored retirement plans. New York allows localities to impose an additional income tax; the average local levy is 2.11%, per the Tax Foundation.

The Empire State also has some of the highest property and sales tax rates in the U.S. Food and prescription and nonprescription drugs are exempt from state sales taxes, as are greens fees, health club memberships, and most arts and entertainment tickets.

The median property tax on the state's median home value of $279,100 is $4,703, the 10th-highest rate in the U.S.

While New York has an estate tax, a law that took effect in 2015 will make it less onerous. Estates exceeding $4,187,500 are subject to estate tax in fiscal year 2016–2017, with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting Jan. 1, 2019, it will be indexed to the federal exemption. But if you’re close to the threshold, get a good estate lawyer, because New York has what’s known as a "cliff tax." If the value of your estate is more than 105% of the current exemption, the entire estate will be subject to state estate tax.

8.  New Jersey:

State Income Tax: 1.4% (on as much as $20,000 of taxable income) – 8.97% (on taxable income greater than $500,000)

Average State and Local Sales Tax: 6.97%

Estate Tax/Inheritance Tax: Yes/Yes

The Garden State's tax policies create a thicket of thorns for some retirees.

Its property taxes are the highest in the U.S.The median property tax on the state's median home value of $313,200 is $7,452.

While Social Security benefits, military pensions and some retirement income is excluded from state taxes, your other retirement income could be taxed as high as 8.97%. And New Jersey allows localities to impose their own income tax; the average local levy is 0.5%, according to the Tax Foundation.

Residents 62 or older may exclude as much as $15,000 ($20,000 if married filing jointly) of retirement income, including pensions, annuities and IRA withdrawals, if their gross income is $100,000 or less. However, the exclusion doesn’t extend to distributions from 401(k) or other employer-sponsored retirement plans.

New Jersey is one of only a couple of states that impose an inheritance and an estate tax. (An estate tax is levied before the estate is distributed; an inheritance tax is paid by the beneficiaries.) In general, close relatives are excluded from the inheritance tax; others face tax rates ranging from 11% to 16% on inheritances of $500 or more. Estates valued at more than $675,000 are subject to estate taxes of up to 16%. Assets that go to a spouse or civil union partner are exempt.

Proposals to increase the state’s estate-tax threshold—the lowest in the U.S.—to levels that would ensnare fewer estates have been derailed by the state’s financial woes. George Mason University’s Mercatus Center ranks New Jersey 48th in its analysis of states’ fiscal health.

7.  Nebraska:

State Income Tax: 2.46% (on taxable income as much as $3,060/individual, $6,120/joint) – 6.84% (on taxable income greater than $29,590/individual, $59,180/joint)

Average State and Local Sales Tax: 6.87%

Estate Tax/Inheritance Tax: No/Yes

The Cornhusker State taxes Social Security benefits, but new rules that took effect in 2015 will exempt some of that income from state taxes. Residents can subtract Social Security income included in federal adjusted gross income if their adjusted gross income is $58,000 or less for married couples filing jointly or $43,000 for single residents.

Nebraska taxes most other retirement income, including retirement-plan withdrawals and public and private pensions. And the state’s top income-tax rate kicks in pretty quickly: It applies to taxable income above $29,590 for single filers and $59,180 for married couples filing jointly.

Food and prescription drugs are exempt from sales taxes. Local jurisdictions can add an additional 2% to the state rate.

The median property tax on the state's median home value of $133,800 is $2,474, the seventh-highest property-tax rate in the U.S.

Nebraska's inheritance tax is a local tax, ranging from 1% to 18%, administered by counties. Assets left to a spouse or charity are exempt.

6.  California:

State Income Tax: 1% (on taxable income as much as $7,850/individual, $15,700/joint) – 13.3% (on taxable income greater than $1 million/individual, $1,052,886/joint)

Average State and Local Sales Tax: 8.48%

Estate Tax/Inheritance Tax: No/No

California exempts Social Security benefits, but all other forms of retirement income are fully taxed. That’s significant, because residents of the Golden State pay the third-highest effective income tax rate in the U.S.

Early retirees who take withdrawals from their retirement plans before age 59½ pay a 2.5% state penalty on top of the 10% penalty imposed by the IRS.

At 7.5%, state sales taxes are the highest in the country, and local taxes can push the combined rate as high as 10%.

The median property tax on the state's median home value of $412,700 is $3,160.

5.  Montana:

State Income Tax: 1% (on as much as $2,900 of taxable income) – 6.9% (on taxable income greater than $17,400)

Average State and Local Sales Tax: None

Estate Tax/Inheritance Tax: No/No

You won’t pay sales tax to shop in the Treasure State, but that may be small comfort when you get your state tax bill.

Montana taxes most forms of retirement income, including Social Security benefits, and its 6.9% top rate kicks in once your taxable income exceeds a modest $17,400.

Montana allows a pension- and annuity-income exemption of as much as $3,980 per person if federal adjusted gross income is $35,180 ($37,170 if filing a joint return) or less. If both spouses are receiving retirement income, each spouse can take up to the maximum exemption if the couple falls under the income threshold. Montana also permits filers to deduct some of their federal income tax.

The median property tax on the state's median home value of $196,800 is $1,653, below average for the U.S.

4.  Oregon:

State Income Tax: 5% (on taxable income as much as $3,350/individual, $6,700/joint) – 9.9% (on taxable income greater than $125,000/individual, $250,000/joint)

Average State and Local Sales Tax: None

Estate Tax/Inheritance Tax: Yes/No

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