You may dream of moving in retirement for any one of several reasons: plentiful recreational opportunities, affordable real estate, or top-notch medical centers. But for many retirees looking to pick up stakes, taxes are a big reason one state wins out over another.

And that can be a smart way of thinking.

Exploring your tax liability for various retirement destinations before you retire is important in determining your expenses as part of your overall retirement planning. In some cases, it can have a big impact on your budget.

“If you live in a high-tax state and are considering relocating in retirement, it could make financial sense to move to one that would reduce your tax liability,” says Vinay Navani, CPA and shareholder at WilkinGuttenplan.

While federal taxes are the same wherever you live in the U.S., there can be a big discrepancy in taxes by state. You should consider all the types of taxes imposed by states to better understand their implications on your overall tax bill.

These can include:

• Income tax |
• Property tax |
• Sales tax |
• Excise tax |
• Estate and inheritance taxes

1. Income tax

A lot of people looking to reduce their month-to-month retirement expenses gravitate toward states without an individual income tax. Currently, seven states do not tax personal income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming (see map below). Two more states — Washington and New Hampshire — don’t tax personal wages but Washington taxes capital gains and certain other capital assets. New Hampshire taxes interest and dividend income, but only until the end of 2024.

Of the states that do tax wages, 12 states have a flat rate tax and the remaining states have a graduated income tax rate. In addition to states imposing income taxes, some localities within the state may do so as well.

The Tax Foundation, a nonprofit research organization, provides a database of state income tax rates and state income tax brackets where you can access the most current information for each state. 

2. Property tax

High property taxes can add to the burden of housing costs as people age. The most prevalent housing problem for older American households — those with members 65 and older — is the “housing cost burden,” which identifies expenditures on housing and utilities that exceed 30% of household income, according to the Joint Center for Housing Studies of Harvard University.

And while it is important to look at a state’s average property taxes before moving, local property taxes can vary widely within a state. When looking to relocate, it’s a good idea to contact the local tax collector directly to obtain the most current tax assessment for any properties you may be thinking about purchasing. And even though you may save money by relocating to a state that has low (or even no) income taxes, it may have areas where homeowners are hit with relatively high property taxes.

According to the Tax Foundation, in calendar year 2022,  New Jersey has the highest effective tax rate on owner-occupied property at 2.08% and Hawaii was at the other end of the spectrum with the lowest effective rate of 0.26%.²

You can see a breakdown of the average state and county property tax rates here.

And, it’s important to remember that you may get less relief from high state taxes than you once did. The 2017 Tax Cuts and Jobs Act capped allowable state and local tax deductions, including property tax, at $10,000 (for individuals and married couples, filing jointly), though that cap is set to expire at the end of 2025 unless lawmakers act to extend it.

“As a result, people who live in states with high taxes, such as New Jersey, New York or California, may not be able to deduct all of their state taxes paid on their federal return,” says Navani. Because of that, some people are finding they owe more in federal income tax.

3. Sales tax

Several of the states without an individual income tax compensate by implementing a higher state sales tax. Those hidden costs could have a real impact on your budget.

According to the Tax Foundation, 45 states and the District of Columbia collect state-wide sales tax, and 38 states have local sales taxes, which can be in addition to the state tax.

4. Excise taxes

Low-tax states can make up for lost revenue in other ways. Several of the states without an individual income tax compensate by implementing excise taxes.

These taxes can add to your day-to-day expenses in retirement. Some state governments impose excise taxes on services and products such as fuel, vehicle registrations and cell phone plans. These taxes are paid by the businesses that sell the products or services and can result in higher prices for the consumer.

5. Estate tax and inheritance tax

While estate taxes are owed by the estate after someone dies, inheritance taxes are owed by the individual who receives money from the estate. States can impose one — or both — types of taxes. Because of this, in retirement, whether your home state imposes estate or inheritance taxes should play into your estate planning. 

Looking ahead to how your beneficiaries will fare, you may want to compare estate or inheritance taxes in your current and future home states. Most states don’t impose these taxes, but in those that do, there may be a much lower exemption to the federal estate tax, which means that state estate  and inheritance taxes may kick in well before federal estate taxes will.

You can get current information on each state’s estate and inheritance taxes here.

Run a projection of your new tax bill

“One way to get a clearer idea of the tax implications of relocating is to ask your tax professional to run a projection of what your tax picture might look like in the new location,” Navani suggests.

A new state might treat your retirement income differently. Above certain adjusted gross income levels (plus certain modifications), you could owe federal income taxes on a portion of your Social Security benefits. But at the state level, the rules vary, with some states matching the federal approach and others exempting Social Security benefits from state income taxes (often pegged to your total income).

Nine states – Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia — tax Social Security benefits to varying degrees with some including exemptions based on income levels. West Virginia, however, recently passed a law that will eliminate income tax on Social Security benefits starting January 1, 2026. The remaining states either do not have a state income tax or do not include Social Security benefits when determining your taxable income.

Another potential tax issue to explore is how your new state might treat your pension payments for income tax purposes. Among states that collect income taxes, some states may exclude all or a portion of qualifying pension income from state taxes. 

And “you can’t look at relocating in a tax vacuum,” notes Navani. You should look at the overall prices in the area where you’re considering relocating — everything from utilities and groceries to healthcare costs and your car and homeowners insurance. Also, consider non-income taxes such as real estate tax and sales tax in your new location.

By partnering with your tax professional and your financial advisor, you will have a clearer picture of how taxes at the local, state and federal level, as well as other expenses, will impact you during your retirement.

“In addition to talking to a tax expert, be sure to consult your financial advisor about the impact that relocating could have on your retirement strategy, as well as your bigger financial picture,” Storey adds. “Speaking with an advisor can help give you a sense of how your expenses and income could shape your lifestyle if you decide to move.”