The 14 Worst States in America for Retirement Taxes

Retirees understand the importance of holding on to their dollars and dimes. Keeping taxes low is one of the best ways to ensure a nest egg lasts throughout your golden years.

Unfortunately, some states tax seniors at high rates, making it more difficult to have a stress-free retirement. Here are the worst states in America for retirement taxes.

California

California is notorious for having some of the highest tax rates in the country. The top marginal income tax rate in the Golden State is 13.3%. No other state taxes income at such a high rate.

While Social Security benefits are exempt from state taxation, the state taxes all other retirement accounts at ordinary rates. Both private and public pensions are subject to full taxation. Sales taxes are among the highest in the U.S.

Connecticut

All types of retirement income face taxation in Connecticut, although some lower-income seniors escape having to pay tax on Social Security benefits.

If you own a home in the Nutmeg State, you will also pay some of the highest property taxes in the U.S.

Minnesota

Minnesota's top income tax rate is 9.85%, the seventh-highest in the U.S. Taxes are due on most forms of retirement income and Social Security benefits, although seniors can access deductions and other tax breaks.

Both property taxes and sales taxes tend to be on the high side in the North Star State.

Hawaii

The price of retiring to paradise is quite high, as Hawaii's top income tax rate of 11% is the second-highest in the nation.

On a more positive note, Social Security benefits and private and public pension income escape taxation. But the Aloha State has its own estate tax, and the overall cost of living is notoriously high.

Nebraska

Nebraska does not tax Social Security income. However, taxes are levied on other types of retirement income.

In addition, property taxes in the Cornhusker State tend to be on the high side. Nebraska also has an inheritance tax.

Vermont

Vermont seniors pay taxes on retirement income at rates as high as 8.75%, among the highest in the U.S. Social Security benefits are subject to such taxation.

The Green Mountain State's property taxes are also high, affecting retirees who own their homes.

Rhode Island

Most types of retirement income in Rhode Island are subject to taxation. Taxpayers with higher incomes will also see their Social Security benefits taxed.

The Ocean State also has high property taxes and levies its own state estate tax.

Maine

Retirement income in Maine is subject to taxes as high as 7.15%. The state also has its own estate tax.

On a more positive note, the Pine Tree State has relatively affordable property taxes, making it slightly more attractive for homeowners.

New York

New York's income tax rate tops out at 10.9%, the third-highest top rate in the country. Both sales and property taxes are also high.

However, the Empire State offers a deduction of up to $20,000 on income from private pensions and retirement accounts.

New Jersey

The top income tax rate in New Jersey is 10.75%, falling just below that of its neighbor, New York. Property taxes are also high.

However, the Garden State does offer breaks on retirement accounts and pension income if your income is lower.

Utah

Utah taxes Social Security benefits. Retirement account and pension income is also subject to state income tax rates. Fortunately, Utah has a relatively low flat tax of 4.45%.

In addition, the Beehive State offers a small tax credit that seniors can use to offset some of the tax cost.

Oregon

Retirement accounts are fully taxed in Oregon. The top income tax rate in the state is 9.9%, sixth-highest in the country.

Social Security benefits in the Beaver State do not face state taxation, but property taxes are relatively high, making it a tougher sell for homeowners.

Massachusetts

Massachusetts does not tax Social Security income. However, the good news for retirees ends there.

The Bay State has a top income tax rate of 5%, plus a 4% surtax on taxable income over $1,107,750. Most forms of retirement income are subject to that tax.

The state also has its own estate tax that with an exemption of just $2 million.

Maryland

Maryland is the only state in the nation with both an inheritance tax and an estate tax. Withdrawals from retirement accounts such as an IRA are subject to state taxation in the Old Line State.

However, Social Security benefits are not taxed, and income from 401(k) withdrawals and pensions qualify for an exclusion from taxes.

What are the most tax-friendly states for retirees?

The nine states with no income taxes (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) are considered the most tax-friendly states for retirees. But income taxes shouldn't be the only factor you consider, and some of these states have areas with a high cost of living.

To find the best balance, consider the cost of living, inheritance tax laws, taxes on retirement income and Social Security, and property taxes to find the right state for you.

Bottom line

Where you live has a big impact on your financial fitness in retirement. Some states levy high taxes that will put a few cracks in your retirement nest egg.

At the end of the day, taxes are not the only factor that determines where you should live during your golden years. But they are a major factor you should weigh before choosing where to retire.

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