Retirees: Avoid These States With High Taxes

If you have spent decades building a portfolio designed to generate reliable income in retirement, the last thing you want is a state that has the government taking more than its fair share. Unfortunately, this is exactly what some retirees in certain states have to deal with, where the combination of income taxes, property taxes, sales taxes, and estate taxes can erode purchasing power faster than inflation ever could. The bottom line is that, for retirees, where you retire is a lifestyle decision as much as a portfolio one.

To try and put this all in the right order, we can turn to the latest economic data from the US Census Bureau to give us a clear look at the tax burden residents are having to shoulder in all 50 states. This matters more than headline tax rates, because it captures the full picture, including property taxes, sales taxes, and any other surcharges that can quickly add up. It really doesn't matter if you are living off of dividends, distributions, and Social Security, every dollar that leaves your account for the state is a dollar that isn't compounding.

What follows is a list of the 15 states where retirees face the steepest total tax burdens and some of these are likely to be surprising. Others won't surprise anyone at all (spoiler: California and New York!). Regardless, if you are planning out where to spend your retirement years right now, this list should give you some hard numbers to think through.

Before making the move to Colorado, consider that its 4.4% income tax rate applies to just about every kind of retirement income. This includes 401(k) and IRA distributions, which is why the state has a $7,263 per capita tax burden. What's worse is that Colorado is also one of the eight states that still, yes, still, taxes Social Security benefits even if some exemptions exist.

Even without state income taxes, Washington state still has a per capita tax burden of around $7,431 per resident. This number is thanks to an average 9.38% combined sales tax and 9.9% tax on capital gains over $270,000. Retirees with considerable estates also have to look at the state having a massive 35% on all estates, the highest number in the entire country.

While Delaware retiree residents will avoid sales taxes, income taxes can reach as much as 6.6% on earnings above $60,000. What's worse is that the state fully taxes all 401(k) and IRA distributions with no special exclusions. Delaware might have a reputation as being tax-friendly for corporations, but that same reputation doesn't extend to retirees.

Exemption from Social Security for most retirees, New Mexico excludes all residents 65 with an extra $8,000 in additional income, a nice carveout for those on fixed incomes. Beyond this threshold, income tax comes in at rates as high as 5.9%, and gross receipt tax averages around 7.5%. Economic data leaves New Mexico taxing residents around $7,752 per capita, good enough for it to be the 12th most expensive state for retirees.

Maryland's state income tax can reach up to 5.75%, but county-level taxes will unfortunately push things up another 3.2%, which means that retirees might "enjoy" a whopping 8% taxation in some areas. This can result in an $8,048 per capita burden, and this is true even if Social Security is exempt, but 401(k) and IRA distributions don't get the same courtesy.

Minnesota is going to tax its retirees' 401(k) and IRA distributions at rates ranging as high as 9.85% without any special exemptions for residents 65 and over. The other big consideration for Minnesota is that it also taxes Social Security for higher earners, which contributes to its per capita burden of around $8,050. This is all unfortunate as Minnesota also has one of the nation's best healthcare systems.

Illinois exempts all retirement income from taxation, including Social Security, pensions, and 401(k) distributions, which should make Illinois one of the best states for retirees. However, what these numbers hide is that Illinois' per capita tax burden of $8,148 is thanks to one of the nation's highest property tax rates, averaging over 2% of a home's value.

Vermont carries the nation's highest property taxes as a percentage of income, which is undoubtedly the primary driver behind its $8,158 per capita burden. Income tax rates can reach 8.75% for higher earners, and Vermont is one of the eight states that still taxes Social Security benefits.

In North Dakota, what you might expect to be a quiet and relatively affordable life is actually not that at all. Living in North Dakota comes with the caveat of an $8,961 per capita figure, thanks to severance taxes on oil and gas that are extracted from the state's natural resources. On the plus side, North Dakota doesn't tax Social Security, and individual income taxes are also gone.

Massachusetts recently added a 4% surtax on income exceeding $1 million, pushing the top tax rate to over 9%, while 401(k) and IRA distributions are fully taxed at a base rate of 5%. The per capita tax burden is around $9,341, with property taxes also among the nation's highest, adding to the financial pressure on retirees.

With the nation's highest property taxes, New Jersey has a median annual property tax payment of $9,500, a figure that is shockingly higher than the $9,366 per capita tax burden. Social Security is exempt on the one hand, and retirement income exclusions can reach $100,000 for households with under $150,000 in income. Income tax can also reach rates as high as 10.75% for higher earners, something retirees with sizable portfolios need to seriously consider.

A state that is likely to come as no surprise for being an expensive retirement destination, Hawaii offers a per capita tax burden of $9,503 dollars. What makes the state a tough recommendation is that while Social Security is exempt, 401(k) and IRA distributions can reach 11%, all while high living costs can greatly affect the amount of purchasing power each resident has in the state. Add to this an excise tax that can hit every dollar multiple times, and Hawaii can be a definite struggle to live on a fixed income.

Even with a Social Security exemption for individuals below a $75,000 AGI as a single filer and $100,000 for joint filers, Connecticut is still a heavy tax burden for retirees. A per capita tax burden of $9,718 is easily understood when you look closely at the state's income tax rate, which can reach 6.99%, and some of the highest property taxes in the nation.

A not-at-all surprising entry on this list, California's per capita tax burden is a whopping $10,319 for retirees and residents. Home to the nation's top income tax rate of 13.3%, California taxes all retirement income except Social Security without any kind of special deductions that could help alleviate the burden. Long-term homeowners can benefit from Prop 13, but new arrivals to California should be prepared for eye-popping home prices and equally expensive property taxes.

We've arrived at the nation's most expensive place to live for retirees as far as tax burdens, and New York's is an eye-popping $12,685 per capita. This is 80% above the national average, and no, that isn't a typo. Income tax rates can reach as high as 10.9%, and while Social Security is exempt, property taxes are ready to take plenty of money out of your investment accounts.