Least Tax-Friendly States for Retirees

Living on a fixed income during retirement can be difficult and every penny counts. Some states help by offering tax benefits to retirees, but these 10 are stingier.

Although many people are working longer past retirement, and even the rich are reluctant to let go of their work completely, the goal is, usually, to retire at some point. The scary part of retirement is having enough money saved and learning to live on a fixed income.

Even if you feel like you’ve saved enough, people are living longer and longer and without additional income, every penny counts.

So, this list doesn’t focus on weather (although the majority of the states here are cold weather states), culture, convenience or even cost of living. Instead, Kiplinger took a look at the one thing retirees can’t really control: taxes.

Some states offer tax benefits to retirees, but there are others that are stingier. Most tax part of Social Security benefits, some have higher-than-average income taxes or high property taxes. And don’t forget that not even death frees your money from being taxed: some states will levy estate and inheritance taxes.

These 10 states are the least tax-friendly for retirees based on numbers from state tax departments, CCH and the Tax Foundation.

10. New York

State income tax: 4% to 8.82%

State sales tax: 4%

Estate tax: Yes

Inheritance tax: No

Peace Bridge connecting Buffalo to Fort Erie, Canada. Photo by Abhinav Hasija.

The Empire State has the worst local and state tax burden in the country, according to The Tax Foundation. However, New York doesn't tax Social Security benefits or public pensions.

While the state sales tax is 4%, local taxing entities impose additional sales taxes ranging from 3% to 4.75%. Real estate is also taxed at the local level, but seniors age 65 and older with income of $81,900 or less are eligible to exempt up to $63,300 of the value of their homes from school property taxes, according to Kiplinger.

Although estates exceeding $1 million are subject to estate tax, with a top rate of 16%, assets left to a spouse are exempt.

9. New Jersey

State income tax: 1.4% to 8.97%

State sales tax: 7%

Estate tax: Yes

Inheritance tax: Yes

The Delaware Water Gap in the Appalachian Mountains

When New York isn’t the reigning champion for the highest tax burden, it’s usually because New Jersey has claimed the spot.

Seniors 65 and older need to have lived in the state for at least 10 years and must meet certain income limits to be eligible for reimbursement of increases in their property taxes.

Social Security benefits and military retirement pay aren’t taxed. Residents 62 or older may exclude up to $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.

Unfortunately, New Jersey is one of only a couple states that impose an inheritance and an estate tax. However, assets that go to a spouse or civil union partner are exempt.

8. California

State income tax: 1% to 13.3%

State sales tax: 7.5%

Estate tax: No

Inheritance tax: No

Big Sur coast

Although Social Security benefits are exempt, all other forms of retirement income are fully taxed. And watch out if you plan to withdraw before age 59-and-a-half. Not only will the IRS impose a 10% penalty, but California has a 2.5% penalty on top of that.

California residents pay the highest income tax rates in the U.S. and the state sales tax recently increased from 7.25% to 7.5%.

Property is assessed at 100% of market value, but taxes are capped at 1% of assessed value. There are no property tax breaks for retirees.

7. Nebraska

State income tax: 2.46% to 6.84%

State sales tax: 5.5%

Estate tax: No

Inheritance tax: Yes

Chadron State Park

Unfortunately, Nebraska doesn’t provide any big tax breaks for retirees. Social Security benefits are taxed to the same extent as they are on your federal return.

Real estate is assessed at 100% of fair market value, except for agricultural land, which is assessed at 75% of market value. Seniors over age 65 who earn less than $25,801 ($30,301 for married couples) are eligible for an exemption of up to $40,000 or 100% of the county's average assessed value of single-family residential properties, whichever is greater, according to Kiplinger.

Nebraska's inheritance tax ranges from 1% to 18%, depending on the recipients' relationship to the deceased. Assets inherited by a spouse or charity are exempt.

6. Oregon

State income tax: 5% to 9.9%

State sales tax: None

Estate tax: Yes

Inheritance tax: No

Portland

There may be no sales tax in Oregon and no tax on Social Security benefits, but the income tax is one of the highest in the U.S., and most other retirement income is taxed.

Homeowners 62 or older who have household income of up to $41,500 may defer paying property taxes, which are due when the homeowner sells the property, no longer lives there permanently or dies, according to Kiplinger.

Oregon's estate tax applies to estates valued at more than $1 million, with the top rate at 16%. Assets left to a surviving spouse or registered domestic partner are exempt.

5. Montana

State income tax: 1% to 6.9%

State sales tax: None

Estate tax: No

Inheritance tax: No

Big Sky Resort

Only five states do not impose a sales tax, and Montana is one of those few. However, the state makes up for that by taxing most forms of retirement income.

And while there's no general sales tax, Montana imposes tourist on accommodations, campgrounds and on rental vehicles.

Homeowners and renters who are 62 or older are eligible for a refundable income tax credit worth up to $1,000 if they have lived in Montana for nine months, occupied a residence for six months and have a gross household income of less than $45,000, according to Kiplinger.

4. Minnesota

State income tax: 5.35% to 9.85%

State sales tax: 6.875%

Estate tax: Yes

Inheritance tax: No

Poke Lake, a small lake only accessible by foot in the Boundary Waters Canoe Area Wilderness. Photo by Reid Priedhorsky.

The state taxes Social Security income to the same extent as the federal government does (up to 85%). Pensions are taxable regardless of whether they're military, government or private pensions.

Homeowners of any age may be eligible for a state-paid refund for homeowners whose property taxes are high relative to their incomes. About one-third of homeowners will receive a refund in 2014, averaging $840, according to Kiplinger.

Minnesota taxes estates valued at more than $1 million with a top rate of 16%. Assets left to a surviving spouse are exempt.

3. Connecticut

State income tax: 3% to 6.7%

State sales tax: 6.35% (7% for certain luxury items)

Estate Tax: Yes

Inheritance tax: No

Hartford

Connecticut is a tax nightmare with the second-highest real estate taxes no exemptions or tax credits for other types of pensions or other retirement income except for half of military retirement income. The state also taxes a portion of Social Security benefits.

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, according to Kiplinger.

However, the estate tax isn’t so bad. 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.

2. Vermont

State income tax: 3.55% to 8.95%

State sales tax: 6%

Estate tax: Yes

Inheritance tax: No

Main Street Montpelier

Vermont taxes most retirement income and Social Security benefits are taxed to the same extent as they are by the federal government.

Vermont's property taxes are the eighth-highest in the U.S., according to the Tax Foundation, and real estate taxes have two components: school property tax and municipal property tax. Both are billed and collected by the town or city and a statewide education tax is imposed on all nonresidential and homestead property. Even worse, there are no property tax breaks specifically for seniors.

1. Rhode Island

State income tax: 3.75% to 5.99%

State sales tax: 7%

Estate tax: Yes

Inheritance tax: No

Pawtucket. Photo by Marc N. Belanger

Not only is Rhode Island among the minority of states that tax a portion of Social Security benefits, but they are taxed up to 85%. Plus, the state also taxes virtually all other sources of retirement income, including pension income.

Real estate taxes are levied by cities and towns and are the fifth-highest in the U.S., although homeowners 65 and older who earn $30,000 or less can get a state tax credit of up to $300.