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Taxes have a way of finding your income no matter where it tries to hide. But what if there were places where you don’t have to play hide and seek?
Remember those road trips you promised yourself you’d take once you retired? Well, it’s time to pack your bags, but this trip is a little different.
With federal taxation, retirement income is subject to a set of considerations that include the nature of the income and your filing status. The IRS does offer certain tax advantages, such as the potential for partially tax-free Social Security benefits, which are contingent on your combined income.
At the state level, the taxation of retirement income introduces additional complexity. Each state operates under its own set of regulations, with some providing substantial exemptions and others levying taxes on retirement income in full.
In the realm of state taxation, there’s a diverse landscape. Some states, like Florida and Nevada, offer a reprieve from income tax, allowing retirees to enjoy their pensions, 401(k)s, and IRAs without the burden of state taxes.
Each state’s approach to retirement income taxation is unique, and a thorough evaluation is beneficial when planning for retirement.
But then, there are states that have a bit more hands-on approach. They’ll give Social Security benefits a pass, but they might tap into other retirement funds. And pensions? It’s a toss-up. Some states tax them, others don’t.
But here’s the good news: even in states where your retirement funds might face taxes, there are often perks and breaks for retirees. You might find tax caps, exemptions if your income is below a certain threshold, or other sweet deals.
The catch is, tax laws change quite often, so it’s crucial to stay updated.
A number of states exempt all retirement income from taxation, whereas others treat IRA and 401(k) withdrawals, pension disbursements, and Social Security payments as taxable income.
However, income tax isn’t the whole picture, since states with reduced or zero income tax often have elevated property, sales, and miscellaneous taxes.
In this group of eight states, residents enjoy a special perk: they don’t pay a dime in state income tax. Whether it’s your income from your 401(k), IRA, pension payments or Social Security check.
What does this mean for you?
Well, if you’re earning a salary, collecting dividends, or cashing in on investments, these states won’t take a cut from your income.
For retirees, this is particularly sweet news. Those Social Security checks, pension payments, and any withdrawals from retirement accounts like 401(k)s or IRAs? They’re all yours, free from state tax.
If you’ve got investments outside of retirement accounts, those earnings are also state tax-free.
Then there’s New Hampshire, which is almost in the same boat. It doesn’t tax your wages or retirement funds, but it does currently tax dividends and interest.
So, if you’ve got some investments that generate these types of income, you’ll want to keep an eye on this, especially since New Hampshire is planning to eliminate these taxes by 2027.
Now, there are four states where, even though they usually have an income tax, they cut retirees some slack. Retirement income, which includes the money from 401(k)s, IRAs, and pensions, as well as those Social Security benefits, gets a free pass.
Here’s the lowdown on those states:
It’s interesting to note that while 11 states currently tax Social Security benefits, the trend is shifting. Many are in the process of phasing out this tax, which is great news for retirees.
Now, let’s talk about the states where your Social Security benefits can stretch further. In these 39 states plus the District of Columbia, Social Security benefits remain untaxed.
This means more financial freedom and one less thing to worry about during your golden years.
These 15 states don’t tax pension income. (Note: Other states may provide a credit or exemption for a portion of pension income.)
Alabama
Alaska
Florida
Hawaii
Illinois
Iowa
Mississippi
Nevada
New Hampshire
Pennsylvania
For South Dakota, Tennessee, Texas, Washington, and Wyoming, the absence of a state income tax means all forms of retirement income, including pensions, 401(k)s, IRAs, and Social Security benefits, are not subject to state taxation. This makes these states particularly attractive for retirees looking to maximize their income. Always remember, tax laws can change, and it’s wise to consult with a tax professional for the most current information.
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