These 8 States Are Quietly Raising Taxes on Some Retirees (Is Yours One? )

For many lawmakers, taxing the wealthy seems like an easy fix for closing budget gaps or funding new programs. In California, progressive activists are pushing a billionaire tax ballot initiative aimed at the very rich. Other states are also considering new taxes on high-income residents, especially as rising costs strain budgets.

This trend is worrisome for investors and even more so for retirees. If your retirement plan includes a large portfolio, a highly appreciated home, business-sale proceeds, or investment income, you could be taxed even if you don't think you're "rich."

Here's a closer look at the states that want to tax high earners and what these policies could mean in practice.

Washington

In 2026, Washington approved a 9.9% tax on annual incomes above $1 million, set to take effect in 2028. The first $1 million of income is exempt, and the measure could generate billions in annual revenue from fewer than 1% of households.

For a state without an income tax, this is a dramatic change. Critics warn that it could encourage investors and business owners to relocate to lower-tax states. Backers claim it may mitigate Washington's heavy reliance on sales taxes, which affect lower-income retirees the most.

Maine

Recently, Maine added a 2% surcharge on some high-income households, framing it as a way to fund public programs without raising taxes on the middle class. The policy is expected to take effect in 2027.

Although it can be argued that the policy makes the tax burden fairer, it's important to consider that even modest surtaxes may lead entrepreneurs and investors to flee the state.

California

Despite already having the country's highest top income tax rates, California continues to explore additional taxation. Lawmakers and activists have proposed taxes on extreme wealth levels and unrealized capital gains. The latter is a controversial concept that taxes appreciation in assets before they're sold. The current proposal is a one-time 5% tax on residents with a net worth of at least $1 billion.

According to proponents, California's enormous concentration of wealth, especially in tech, makes it perfect for this approach. Critics counter that high taxes have already caused high levels of wealth and business outmigration.

Massachussetts

The "Fair Share Amendment" adds a 4% surtax on annual income above $1 million in Massachusetts. The threshold exceeds $1.1 million in 2026 and will be adjusted annually for inflation.

Supporters point to billions in revenue generated since the surtax took effect in 2023. Detractors mention that the measure has adversely affected competitiveness.

New York

New York already has high state and local tax burdens, but in recent years, it has expanded top income tax brackets on high earners and debated wealth-tax-style proposals tied to investment gains.

Advocates argue wealthy households benefit disproportionately from New York's economy and infrastructure, while critics warn aggressive taxation could accelerate migration to no-income-tax states like Florida and Texas.

Since New York combines high income taxes with high property taxes, retirees face substantial risks.

New Jersey

New Jersey has one of the nation's highest tax rates on millionaires, with a top marginal rate of 10.75% on income above $1 million. It was also the first state to tax millionaires extra in 2004.

The policy is deemed necessary to support pensions and state services without increasing taxes on the middle class. However, critics argue that the combination of high property and income taxes makes Jersey less attractive to investors.

Retirees with large retirement account distributions or significant investment income may face especially steep tax burdens.

Minnesota

Although Minnesota hasn't adopted a formal wealth tax yet, lawmakers debate taxing capital gains and expanding top income brackets. The latest proposal is to impose a 1% tax on all "'taxable wealth' over $10 million." Touted as a way to reduce income inequality and support public services, this proposal also risks pushing high earners to greener pastures.

Illinois

Illinois lawmakers are considering a "millionaire tax" that would impose an additional 3% surtax on annual income above $1 million. Currently, Illinois has a flat income tax, so voter approval is required to amend the state constitution before implementing this proposal.

According to proponents, the tax could generate funds for property tax relief and public education. Detractors argue the measure could hurt small business owners.

Do these taxes affect retirees?

Many retirees may think these taxes only affect billionaires or hedge fund managers. In reality, selling a longtime family home or a business, or even taking large required minimum distributions, could temporarily push your income much higher than expected.

For example, if you bought a home decades ago in California, Washington, or New York, you may now be sitting on hundreds of thousands (or even millions) in unrealized appreciation. Add in investment gains or dividends, and your income goes above the threshold.

Many of these taxes also apply to capital gains and investment income. If you're living off investments, you may still be affected by these policies.

Why states are pursuing these taxes

The most common argument in favor of these taxes is that top earners benefit disproportionately from business appreciation, rising asset values, and stock market gains. As states face growing health care, pensions, infrastructure, and education costs, millionaire taxes are often the lawmakers' preferred way to rebalance the system without increasing taxes on the middle class.

Besides, polling often shows that taxing millionaires is more palatable to voters than broad tax hikes affecting average households.

The arguments against higher taxes on the wealthy

There are several reasons critics reject these taxes. They may make investors and business owners move to no- or low-income-tax states, such as Florida and Tennessee.

Taxes heavily tied to investment income and capital gains also create volatile revenue streams when they fluctuate dramatically during stock market downturns.

Finally, there is "threshold creep." These policies initially target ultra-wealthy households. Still, inflation, rising home values, and investment growth may pull more upper-middle-class households and retirees into these tax brackets.

Bottom line

State-level taxes on wealthy residents have gone beyond the theoretical stage. Many states are adopting or debating taxes on millionaires, investment income, and large capital gains. This trend is only likely to accelerate.

Since even a one-time spike in income could ruin your retirement plan, you need to be prepared. If you're planning to sell major assets, review how your state taxes investment income, capital gains, and retirement distributions.

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