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What is the Best State to Retire in for Tax Purposes?

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Oct. 13 2021, Published 10:04 a.m. ET

Retirement is the time in your life when you should be able to kick back, relax, and spend your days doing the things you once had limited time for in the past. But getting the most out of your retirement requires careful planning. Even the state where you choose to retire can affect your retirement years, because cost of living and how much you pay in taxes each year may determine how far your retirement savings will stretch.

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When deciding what state is best to retire in, you’ll want to consider various things including the cost of living, how close you’ll be to family, available attractions to keep busy, and the taxes you’ll be subjected to paying.

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What states offer tax breaks to retirees?

There are certain states that favor retirees by offering tax incentives and others that may cause your hard-earned money to dwindle away quicker. In this article, you’ll be introduced to the states that some might consider to be “tax-friendly” and quite frankly, may be a good choice for someone who is recently retired or is planning on retiring in the near future.

Alabama

Alabama is identified as one of the top 10 most affordable states to live in. The state also exempts the following income from taxation:

  • Military retirement
  • Federal Social Security benefits
  • Benefits paid out by the State of Alabama Teachers Retirement System
  • Firefighter and police officer retirement compensation
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Alabama, unlike some states, will also allow you to exempt some or all of your retirement income, although your adjusted gross income (AGI) will be used to determine how much this is.

Tennessee

Tennessee is another state where the average cost of living is on the lower end of the ladder. This means retirees may find themselves spending less on housing costs. Tennessee might also be an ideal place to relocate for retirement as the state recently repealed its Hall income tax on January 21, 2021. Therefore, you will no longer be subject to having your dividend and interest income taxed.

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The Volunteer State also exempts those aged 65 and older from having their total annual income taxed as long as it is below the state’s annual income limits.

Mississippi

Want to live in a state with a lower cost of living and one that exempts tax on most retirement income? Consider Mississippi. The State of Mississippi generally exempts retirement income, pensions, and annuities from being taxed, and therefore, supports retirees who are looking to spend less and save more.

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"Mississippi’s current average cost of living index is set at 84.10," according to U.S. News & World Report. The base cost of living is generally set at 100. This means if you were to move to Mississippi to retire, the cost of living would be about 16 percent lower than what others would pay in cities that have a cost of living index of 100.

Other tax-friendly states retirees might consider relocating to

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Although money must be spent wisely after retiring, there are other states to consider that do not impose a tax on retirement income. These include:

  • Alaska
  • Florida
  • Texas
  • Wyoming
  • Washington
  • South Dakota
  • Nevada
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Hawaii and Illinois generally exempt most or all retirement income; however, cost of living, sales tax, and property taxes should be taken into account as this alone could have a greater impact on your retirement savings.

Consider the cost of taxes when deciding on a state for retirement

Setting a budget and sticking to it helps many retirees afford the lifestyle they want. Taxes play an integral role in determining how much a retiree will spend each year and should be considered when determining where you want to live when it comes time for you to retire.

While Alabama, Tennessee, and Mississippi may be recognized as some of the best states to retire in as their tax laws are more lenient toward the retired population, taxes are only one of many factors that should be examined when deciding what state to retire in.

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