10 Least Tax-Friendly States for Retirees
These 10 states impose the highest taxes on retirees, according to Kiplinger's 2014 analysis of state taxes. Five of them treat Social Security benefits just like Uncle Sam--taxing up to 85%. Exemptions for other types of retirement income are limited or nonexistent. (To see how retirement income is taxed by state, go to the Retiree Tax Map.)
This year, we also looked at states' capital gains rates because the six-year-long bull market has left many retirees with larger taxable portfolios. While investors typically pay lower federal tax rates on long-term capital gains, most states treat capital gains like ordinary income, notes Kyle Pomerleau, an economist for the Tax Foundation. That can take an unexpected bite out of the investment income of retirees who live in states with high income tax rates. For example, the top combined federal and state capital gains tax rate in California is 33%, according to the Tax Foundation, almost 10 percentage points higher than the fed's top 23.8% tax rate on such profits.
Most retirees keep a close watch on their expenses, and they tend to vote in large numbers. That may explain why lawmakers in several states have attempted to make their environs more welcoming for older residents. In the past year, Maine increased the amount of pension income that's excluded from state taxes. Nebraska boosted its exemption for Social Security income, starting in 2015. And New York and Maryland moved to gradually increase their estate tax exemptions to match the federal exclusion (currently $5.34 million).
See Also: The 10 Most Tax Friendly States for Retirees
#1 Rhode Island
Fort Adams | Courtesy Lara via Wikimedia Commons
State Income Tax: 3.75% to 5.99%
State Sales Tax: 7%
Estate Tax/Inheritance Tax: Yes/No
Even though Rhode Island has dropped its top income tax rate from 9.9% to 5.99%, the Ocean State's tax rates remain among the highest in the U.S. Social Security benefits are taxed to the same extent as they are by the federal government--up to 85%. The state also taxes virtually all other sources of retirement income, including pension income.
Rhode Island's average property taxes as a percentage of home value are the 11th-highest in the U.S. The median property tax on the state's median home value of $267,100 is $3,618, according to the Tax Foundation.
Estates valued at more than $921,655 are subject to Rhode Island's estate tax. The maximum rate is 16%. Assets left to a surviving spouse are exempt.
See Also: 9 Surprising Things You Didn't Know Were Taxable
#2 Vermont
Robbins Workshop | Courtesy Ymblanter via Wikimedia Commons
State Income Tax: 3.55% to 8.95%
State Sales Tax: 6%
Estate Tax/Inheritance Tax: Yes/No
The Green Mountain State taxes most retirement income. Again, Social Security benefits are taxed to the same extent as they are by the federal government--up to 85%.
In addition to the state sales tax, local jurisdictions may add 1%. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But when in Vermont, you'll pay 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.
Vermont's property taxes are the seventh-highest in the U.S., according to the Tax Foundation. The median property tax on a $216,300 median-valued home is a steep $3,444. Real estate taxes have two components: school property tax and municipal property tax. Both taxes are billed and collected by the town or city where the real estate is located. A statewide education tax is imposed on all nonresidential and homestead property. There are no property tax breaks specifically for seniors; however, residents with income of less than $99,000 may be eligible for a rebate of their school and municipal property taxes. The maximum adjustment is $8,000.
Vermont taxes estates that exceed $2.75 million. The maximum estate-tax rate is 16%. Assets left to a surviving spouse are exempt.
More from Kiplinger: 10 Weird Ways States Tax You (and Don't)
#3 Connecticut
Old Newgate Prison | Courtesy Sphilbrick via Wikimedia Commons
State Income Tax: 3.0% to 6.7%
State Sales Tax: 6.35% (7.0% for certain luxury items)
Estate Tax/Inheritance Tax: Yes/No
The Constitution State is a tax nightmare for many retirees. Its real estate taxes are the 10th-highest in the nation, according to the Tax Foundation. Half of military retirement pay is excluded from taxes, but there are no exemptions or tax credits for other types of pensions or other retirement income. The state taxes a portion of Social Security benefits for single taxpayers with federal adjusted gross income of more than $50,000 and married taxpayers filing jointly with federal AGI of more than $60,000.
The median property tax on a $291,200 median-valued home is a hefty$4,738, according to the Tax Foundation. Property taxes are assessed and collected by individual towns or other taxing districts. Married couples who are 65 or older with income of $39,500 or less are eligible for a property tax credit of up to $1,250.
Connecticut taxes estates valued at $2 million or more at a progressive rate, starting at 7.2%, with a maximum rate of 12%. Assets left to a surviving spouse are exempt.
See Also: 10 States with the Scariest Death Taxes
#4 Minnesota
Split Rock Lighthouse | Courtesy Dennis Adams, Federal Highway
Administration via Wikimedia Commons
State Income Tax: 5.35% to 9.85%
State Sales Tax: 6.875%
Estate Tax/Inheritance Tax: Yes/No
Maybe long winters aren't the only reason seniors leave this state for warmer climes. The North Star State taxes Social Security income to the same extent as the federal government (up to 85%). Pensions are taxable regardless of whether they're military, government or private pensions. In 2013, the state added a new top income tax rate of 9.85% on taxable income of more than $150,000 for single filers and more than $250,000 for joint filers.
Food, clothing, and prescription and nonprescription drugs are exempt from the state sales tax. A few cities and counties add their own sales tax.
The median property tax on a $200,400 median-valued home is $2,098, according to the Tax Foundation. Homeowners of any age may be eligible for a state-paid refund for homeowners whose property taxes are high relative to their incomes.
Minnesota taxes estates valued at more than $1.2 million. Assets left to a surviving spouse are exempt. The maximum estate tax rate is 16%. In March, Minnesota repealed a gift tax that had been in effect for less than a year. Minnesota lawmakers also voted to increase the state's estate tax threshold by $200,000 a year until it reaches $2 million in 2018.
#5 Oregon
Old Joseph Gravesite | Courtesy National Park Service via Wikimedia Commons
State Income Tax: 5.0% to 9.9%
State Sales Tax: None
Estate Tax/Inheritance Tax: Yes/No
The Beaver State has no sales tax, but its income tax is one of the highest in the U.S. Taxable income of more than $125,000 ($250,000 for married couples filing jointly) is taxed at 9.9%. Although Oregon doesn't tax Social Security benefits, most other retirement income is taxed. Oregon's top federal and state capital gains rate is 31%, the third-highest in the U.S. For that reason, Oregon moves above Montana in this year's list of tax-unfriendly states.
Oregon allows residents to subtract their current year's federal income tax liability, after credits, up to $6,250 based on income and filing status. There is also a retirement-income credit for seniors with certain income restrictions.
For property taxes, counties assess home values and set tax rates. The median property tax on a $257,400 median-valued home is $2,241, according to the Tax Foundation. Homeowners 62 or older who have household income of up to $42,000 in 2014 may defer paying property taxes. But taxes are due when the homeowner sells the property, no longer lives there permanently or dies.
Oregon's estate tax applies to estates valued at more than $1 million. The top rate is 16%. Assets left to a surviving spouse or registered domestic partner are exempt.
See the Full List: 10 Least Tax-Friendly States for Retirees
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