State Tax Breaks for Seniors

State and local taxes in the new destination could be thousands of dollars more than what you pay now, and the last thing you need in retirement is a big tax surprise.

Kiplinger’s updated Retiree Tax Map can help you compare the tax burden in different states. This handy tool shows you which states tax Social Security benefits and other retirement income, offer property tax exemptions for seniors, tax the sale of groceries or prescription drugs, and much more. You can also do a side-by-side tax comparison of up to five states at a time.

We also used data from the Retiree Tax Map to compile lists of the 10 most and least tax-friendly states for retirees.

Related: How to make your retirement savings last

Delaware claimed the top spot on the most tax-friendly list for the second year in a row, thanks to low property taxes and no state or local sales tax. Alabama, Arizona, Colorado, the District of Columbia, Hawaii, Nevada, South Carolina, Tennessee, and Wyoming joined Delaware on the list.

For high-tax states to avoid, New Jersey takes the crown. The highest median property tax rate in the nation is the main culprit behind the Garden State’s dismal ranking. Other states on this list include Connecticut, Illinois, Iowa, Kansas, Nebraska, New York, Texas, Vermont, and Wisconsin.

Changes to state tax breaks for seniors

Even if you plan to stay put, there are some important changes to state tax laws around the country that you should know about. The good news is that the trend favors lower taxes on seniors.

We see this most clearly with taxes on Social Security benefits. For instance, as of 2021, North Dakota no longer taxes Social Security benefits. In Utah, Social Security benefits are included in taxable income to the same extent they’re taxed at the federal level, but a new state tax credit is available for Social Security benefits starting with the 2021 tax year. The percentage of Social Security benefits excluded from West Virginia tax jumps from 35% to 65% in 2021 for single taxpayers with federal adjusted gross income (AGI) of $50,000 or less ($100,000 or less for joint filers), and hits 100% in 2022 for qualifying seniors. In Colorado, a rule change will effectively make all federally taxed Social Security income deductible for taxpayers ages 65 and over starting in 2022.

There are new or improved tax breaks for other forms of retirement income, too. In Connecticut, taxes on traditional IRA distributions will phase out, starting in 2023, over four years for qualifying seniors. Montana taxpayers ages 65 and older will receive a more generous tax break in 2024 – a deduction of up to $5,500 on any income, regardless of their federal AGI.

© 2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.