Honorable Mentions: States Worth a Closer Look
The eight states we’ve highlighted are fantastic starting points, but every state has a unique profile. Here are two more that offer compelling tax advantages for retirees.
South Carolina
South Carolina is a popular retirement destination for its mild climate and beautiful coastline, but its tax code is also quite welcoming. The state does not tax Social Security benefits. For other forms of retirement income, taxpayers under 65 can deduct up to $3,000, and those 65 and older can deduct up to $10,000 from their state income tax bill. Furthermore, property taxes are very low, and homeowners 65 and older who have lived in the state for at least a year can benefit from a substantial homestead exemption, which exempts the first $50,000 of their home’s fair market value from local property taxes.
The main consideration is that South Carolina’s income tax rates can be relatively high for those with significant income that falls outside of these generous deductions.
Alabama
Alabama is another Southeastern state with a low cost of living and a retiree-friendly tax structure. Social Security benefits are fully exempt, as are payments from traditional defined-benefit pension plans. This makes Alabama a standout choice for retirees with government or military pensions. Property taxes are among the very lowest in the entire country. All homeowners 65 or older are exempt from the state portion of property tax, which is a significant savings.
The trade-off is that distributions from 401(k)s and IRAs are generally taxable. Also, Alabama’s sales tax can be high when you include local rates, and it is one of the states that taxes groceries, which can impact your monthly budget.
Alabama, beginning in 2025, exempts the 5% state tax on up to $12,000 dollars that is withdrawn from an IRA/401K account by people that are 65+. A savings of up to $600 dollars from a $12,000 dollar withdrawal..