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States with the Biggest and Smallest Retirement Tax Bite

Summary:
Remember that sage financial warning, “It’s not how much you make. It’s how much you keep.” Truer words were never spoken when it comes to retirement income. And taxes, federal and state, are one of the biggest determinants in just how much retirees have to live on. Here are some taxes you’re likely to see in retirement, who’s doing the taxing, and how friendly—or unfriendly—they are to you.   Social Security For many, Social Security is a major portion of retirement income. The myth is that Social Security benefits are not taxed. Not true! In fact, more than 55% of retirees who receive a Social Security payout have to pay federal taxes on 50% to 85% of their benefit. The IRS will tax your Social Security: If you’re single and your combined income is between ,000-,000 you’ll have to

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Remember that sage financial warning, “It’s not how much you make. It’s how much you keep.” Truer words were never spoken when it comes to retirement income. And taxes, federal and state, are one of the biggest determinants in just how much retirees have to live on.

Here are some taxes you’re likely to see in retirement, who’s doing the taxing, and how friendly—or unfriendly—they are to you.

 

Social Security

For many, Social Security is a major portion of retirement income. The myth is that Social Security benefits are not taxed. Not true! In fact, more than 55% of retirees who receive a Social Security payout have to pay federal taxes on 50% to 85% of their benefit.

The IRS will tax your Social Security:

  • If you’re single and your combined income is between $25,000-$34,000 you’ll have to pay income tax on up to 50% of your benefit.
  • If you’re single and your combined income is more than $34,000, you’ll pay income tax on 85% of your benefit.
  • If you’re married filing a joint return and combined income is between $32,000-$44,000 you’ll pay income tax on up to 50% of your benefits.
  • If you’re married filing jointly and combined income is above $44,000, you’ll pay income tax on 85% of your benefit.

 

But that’s just the Feds. 13 states also tax Social Security benefits. Colorado, Connecticut, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Montana, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Each of these states has a formula used to determine how much of your Social Security is taxed. It may be a portion of what’s taxed by the federal government or all of what’s taxed by the federal government or it may be based on a retired taxpayer’s adjusted gross income (AGI) or some combination.

 

Income Taxes

According to the Tax Foundation, these were the top 10 highest income tax states or legal jurisdictions in 2020.

  • Wisconsin-7.65%
  • Iowa-8.53%
  • Vermont-8.75%
  • New York-8.82%. However, the governor has proposed raising the tax to 10.82%
  • Washington D.C.-8.95%
  • Minnesota-9.85%
  • Oregon-9.9%
  • New Jersey-10.75%
  • Hawaii-11%
  • California-13.3%

 

On the opposite end of the spectrum, there are nine states with no state income tax:  Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

 

Sales Tax

There are five states that have no sales tax:  Alaska, Delaware, Montana, New Hampshire, and Oregon.

According to the Tax Foundation, in 2020, the ten states with the highest state and local combined sales tax rate were:

  • Tennessee-9.53%
  • Louisiana-9.52%
  • Arkansas-9.47%
  • Alabama-9.22%
  • Washington-9.21%
  • Illinnois-9.08%
  • Oklahoma-8.94%
  • Kansas-8.68%
  • California-8.66%
  • New York-8.52%

 

Death Tax

On a federal level, most people aren’t worried about estate taxes. In 2021 you have to have an estate larger than $11.7 million before anything is due. But just because there’s no federal estate tax bill, it doesn’t mean there won’t be state death taxes. Fortunately, there are 33 states that have no estate or inheritance tax:  Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.

There are, however, 17 states and the District of Columbia where the taxman is right behind the grim reaper.

  • Connecticut
    • Estate taxes on amounts above $7.1 million. Tax rates 10.8%-12%
    • No inheritance tax
  • District of Columbia
    • Estate taxes on amounts above $4 million. Tax rates 12%-16%
    • No inheritance tax
  • Hawaii
    • Estate taxes on amounts above $5.49 million. Tax rates 10%-20%
    • No inheritance tax
  • Illinois
    • Estate taxes on amounts above $4 million. Tax rates 0.8%-16%
    • No inheritance tax
  • Iowa
    • No estate tax
    • Inheritance tax. Tax rates 5%-15%
  • Kentucky
    • No estate tax
    • Inheritance tax. Tax rates 4%-16%
  • Maine
    • Estate tax on amounts above %5.87 million. Tax rates 8%-12%
    • No inheritance tax
  • Massachusetts
    • Estate tax on amounts above $1 million. Tax rates 0.8%-16%
    • No inheritance tax
  • Minnesota
    • Estate tax on amounts abo e $3 million. Tax rates 13%-16%
    • No inheritance tax
  • Nebraska
    • No estate tax
    • Inheritance tax. Tax rates 1%-18%
  • New Jersey
    • No estate tax
    • Inheritance tax. Tax rates 11%-16%
  • New York
    • Estate tax on amounts above $5.93 million. Tax rates 3.06%-16%
    • No inheritance tax
  • Oregon
    • Estate tax on amounts above $1 million. Tax rates 10%-16%
    • No inheritance tax
  • Pennsylvania
    • No estate tax
    • Inheritance tax. Tax rates 4.5%-15%
  • Rhode Island
    • Estate tax on amounts above $1,595,156. Tax rates 0.8%-16%
    • No inheritance tax
  • Vermont
    • Estate tax on amounts above $5 million. Tax rate flat 16%
    • No inheritance tax
  • Washington
    • Estate tax on amounts above $2.193 million. Tax rates 10%-20%
    • No inheritance tax

 

And we’ve saved the best for last. Maryland, which has both an estate and inheritance tax.

  • Estate taxes on amounts above $5 million. Tax rates 0.8%-16%
  • Inheritance tax. Tax rate flat 10%

 

When considering retirement income, you also have to consider property taxes, excise taxes, license fees, and the list goes on and on.  So, let’s end where we began. “It’s not how much you make. It’s how much you keep.” Your retirement depends on it.

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