The Retiree’s Guide to Tax-Free States in the U.S.

What if you never had to pay state income taxes again? It may sound like a dream, but it’s a reality for residents of nine U.S. states that currently don’t tax earned income. While everyone pays federal income taxes, moving to one of these tax havens could put thousands back in your pocket each year in retirement.

The highest state income tax rate in the nation is a whopping 13.3% in California. For a retiree with $80,000 in annual income, that could mean paying over $10,000 in state taxes alone—on top of their federal tax bill. However, those earnings would be untouched by the state in states like Florida or Texas that charge zero income tax.  

Before you start packing the U-Haul, it’s important to understand that states still need to generate revenue to pay for public services like roads, education, health care, and safety. The nine states with no income tax often compensate through higher sales tax rates, property taxes, excise taxes on items like gasoline, and sin taxes on things like alcohol and tobacco.  

So, is Tax-free Living all it’s Cracked up to be For Retirees? 

The answer is: It depends. A lower overall tax burden is certainly appealing, especially for seniors on a fixed income. But uprooting to a new state is a major life decision that hinges on far more than just taxes.

The 9 States With No Income Tax 

Currently, nine states do not levy a tax on regular income:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee 
• Texas
• Washington
• Wyoming

State-by-State Tax Policy Breakdown 

While the nine tax-free states in the U.S.  share the commonality of not taxing regular income, their overall tax policies are quite diverse. Let’s take a closer look at how each state generates revenue and what that means for retirees.

States With No Income Tax

Alaska

• No state income tax
• There is no state sales tax, but local sales taxes average 1.76%
• Average property tax rate of 1.19%
• No estate or inheritance tax

Alaska is tax-friendly, with low property taxes and no income, sales, or estate taxes.

Florida

• No state income tax
• 6% state sales tax, with local taxes adding an average of 1.01% 
• Average property tax rate of 0.89% 
• No estate tax, but it does have an inheritance tax

Florida’s lack of income and estate taxes makes it an attractive state for retirees

Nevada

• No state income tax
• 6.85% state sales tax, with local taxes adding an average of 1.38%
• Average property tax rate of 0.48%
• No estate or inheritance tax

Nevada offers low property taxes and no income or estate taxes, adding to its appeal for residents.

South Dakota

• No state income tax 
• The Tax Foundation mentions that there is 4.2% state sales tax, with local taxes adding an average of 1.9%
• Average property tax rate of 1.01% 
• No estate or inheritance tax

South Dakota combines low sales and property taxes with no income or estate taxes.

Tennessee

• No state income tax 
• 7% state sales tax, with local taxes adding an average of 2.55%
• Average property tax rate of 0.48%
• No estate or inheritance tax

The absence of income, estate, or inheritance taxes balances Tennessee’s high sales tax.

Texas 

• No state income tax
• 6.25% state sales tax, with local taxes adding an average of 2%
• Average property tax rate of 1.8%
• No estate or inheritance tax  

Texas is tax-friendly with no income or estate taxes, though property taxes are higher.

Wyoming

• No state income tax
• 4% state sales tax, with local taxes adding an average of 1.44%
• Average property tax rate of 0.55%
• No estate or inheritance tax

Wyoming offers low taxes overall, with no income or estate taxes and moderate sales and property taxes.

States Taxing Interest/Dividends

New Hampshire

• 5% tax on interest and dividend income, exempting $2400 per individual
• No state sales tax, but does charge an 8.5% tax on restaurant meals and room rentals
• Average property tax rate of 1.89%, the 3rd highest in the nation
• No estate or inheritance tax

New Hampshire is in the process of phasing out its interest and dividends tax. The rate will drop by 1% per year until it is eliminated in 2027. New Hampshire is one of the few states without state taxes. Property taxes in New Hampshire are some of the highest in the country, but the state has no sales tax on goods.

States With Capital Gains Tax

Washington 

• No income tax but a 7% tax on long-term capital gains exceeding $250,000  
• 6.5% state sales tax, with local taxes adding an average of 4.1%
• Average property tax rate of 0.84%
• Estate tax of 10%-20% on estates exceeding $2.193 million

The state has an estate tax but no inheritance tax. Washington also charges sin taxes on items like alcohol, cigarettes, and gasoline.

As this breakdown illustrates, retirees considering a move to a tax-free state need to look beyond the income tax rate alone. Sales, property, estate, and other types of taxes can still take a significant bite out of your budget. 

The Pros and Cons of Living in a Tax-free State

On the surface, the idea of living free from state income taxes can seem like a no-brainer, especially for retirees aiming to stretch their savings. But as with most financial decisions, there are potential tradeoffs to consider. Let’s weigh some of the key advantages and drawbacks.

Advantages of tax-free Living

• More money in your pocket: The most obvious benefit of living in a state with no income tax is that you’ll get to keep more of your hard-earned money. This is especially advantageous for retirees who are living off a fixed income from sources like pensions, Social Security, or retirement account withdrawals. 
• Avoid taxes on retirement income: In addition to a general income tax, some states also levy specific taxes on various types of retirement income. However, tax-free states typically exempt most common sources of retirement income from taxation, too. For example:
  • 37 states don’t tax Social Security benefits
  • 12 states tax some, but not all, retirement income
  • 7 states have no income tax and also no tax on retirement income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
  • New Hampshire taxes dividend and interest income but not income from retirement plans
• Friendly for the self-employed: Tax-free states in the U.S. can also be particularly appealing to older adults who are self-employed or own small businesses. If you’re a consultant, freelancer, contractor, or entrepreneur, you’re responsible for paying self-employment taxes (Social Security and Medicare taxes) on top of your regular income taxes. Eliminating the state income tax on your earnings could make a meaningful difference in your profit margins and overall tax burden.

Drawbacks of tax-free Living

• Higher sales and property taxes: States without income tax still rely on higher sales and property taxes to generate revenue for public services. This can result in higher sales and property taxes, especially for retirees spending on health care, travel, dining out, and leisure activities.
• Potentially reduced public services: States without income taxes have less funding for public services like road maintenance, public transportation, and health and education. This can lead to longer emergency response times, crowded hospitals, and fewer public transportation options. It’s important to consider the quality of public services in an area before assuming that less taxation means a higher quality of life.
• You may still owe other taxes: Moving to an income tax-free state won’t exempt you from federal income taxes. If you move from a high-tax state, you might initially face a larger federal tax bill without state tax deductions. You may also owe non-resident taxes if you work in another state with personal income tax. Additionally, owning property or earning income in your former state may require you to file taxes as a part-year resident. Living tax-free doesn’t guarantee complete tax exemption.

Ultimately, the promise of lower taxes with a move to one of these nine states is tempting for many retirees on a fixed income. But it’s not quite as simple as it seems on the surface. Crunching the numbers on your total tax liability and considering how a move would affect your overall quality of life is key to making an informed choice.

5 Factors to Consider Before Moving to a Tax-free State

Aside from taxes, there are several other important points to think through before packing up and moving across state lines. After all, your retirement isn’t just about money—it’s about living a fulfilling, comfortable life in a place that meets your needs and supports your goals. Here are five key factors to consider.

1. Will I qualify as a legal resident? 

To take advantage of a state’s tax benefits, you’ll need to establish legal domicile there, which essentially means making it your primary and permanent home. Most states require you to spend at least half the year (183 days) living there to be considered a legal resident. 

You’ll also need to take steps like getting a driver’s license, registering to vote, updating the address on your bank accounts and legal documents, and potentially establishing ties like joining a local organization or place of worship. If you split your time between multiple states, it’s important to keep careful records of where you spend your days to avoid any confusion or disputes over your residency status. Some retirees have even been audited based on “tedious” factors like where they kept their dental records or pet’s veterinarian.

2. Can I find compelling work there if needed?

Many of today’s retirees are choosing to continue working part-time or starting encore careers to stay active and engaged. If you anticipate needing or wanting to work, be sure to investigate the job market in your potential new state. Some key questions to ask:

• How robust is the economy and job market overall? Which industries are growing?
• Are there ample opportunities for experienced, older workers or retirees? 
• What’s the unemployment rate and average job growth compared to the national average?
• Is the state tax and regulation friendly for small businesses and startups?
• What sorts of continuing education or reskilling programs are available?

A state might be tax-friendly, but if it ranks low for jobs, starting a business, or economic growth, that could hamper your ability to earn extra income or pursue meaningful work in retirement.

3. Will my cost of living really be lower overall?

As we’ve explored, a state’s income tax rate doesn’t tell the full story of how expensive or affordable it is to live there. To really gauge the potential savings of moving to a tax-free state, you’ll need to tally up all your major expenses and compare. 

In particular, pay attention to:

• Housing costs: Median home prices, property taxes, and home insurance rates can vary widely from state to state, as can rental rates. A lack of income tax can spur population growth, driving up housing costs, as seen recently in states like Texas and Florida. 
• Health care: In addition to having lower or no income taxes, the most affordable states for retirees typically have below-average health spending per capita, lower insurance premiums, and cost transparency for procedures. However, a state’s tax policy can also influence healthcare prices.
• Utilities and transportation: Recurring costs like electricity, heating and cooling, water, gas, and public transit can add up, especially in spread-out or very hot or cold states.  
• Food and dining: Local prices for groceries, restaurants, and specialty food items may be higher or lower than national averages.
• Travel and leisure: Consider a state’s tax rates on travel-related purchases like rental cars, hotel stays, and event tickets, as well as on shopping, dining out, and discretionary spending.

You can use a cost-of-living calculator to compare basic expenses in different states, but you should also consider less obvious “hidden” costs like traveling back to visit family or maintaining property if you become a snowbird.  

4. Will I be able to access high-quality health care?

Let’s face it—as we get older, health care becomes an increasingly important consideration. Even if you’re in tip-top shape now, you’ll want to be sure your new state has an ample supply of great doctors, hospitals, and preventive care resources to support a healthy retirement.

One good metric to look at is the number of primary care physicians per capita. You can also compare states on health benchmarks like preventable hospitalizations, health screenings, and nursing home quality ratings.

If you have any pre-existing conditions or chronic health issues, be sure to check that there are specialists and facilities in your new state that can provide appropriate ongoing care. And dig into the details of Medicare Advantage or supplemental plan options to ensure you’ll have adequate, affordable coverage.

5. Will I enjoy living there when I’m not crunching numbers?

Financial factors aside, perhaps the most important question is simply—will you be happy there? To answer that, think about how you envision spending your days in retirement. Do you picture yourself:

• Enjoying warm weather and outdoor activities like golfing, swimming, and tennis?
• Taking advantage of cultural institutions like museums, theatres, and historical sites?
• Pursuing continuing education through classes at a local college or community center? 
• Staying physically and socially active through fitness programs, clubs, and events targeted at seniors?
• Traveling regularly to visit children, grandchildren, and far-flung friends?

Make a list of your most cherished retirement goals and activities, then investigate which states offer the amenities, attractions, and opportunities that best align. Spend time exploring potential communities online or in person to get a feel for the lifestyle and local culture. 

Talk to current residents in your desired demographic to get honest, firsthand perspectives. If possible, plan an extended visit of a month or more, ideally in more than one season, to do a real-life road test before committing to a permanent move.

Weighing the Pros and Cons for Your Dream Retirement

There’s no question that moving to a tax-free state in retirement can help you keep more money in your pocket and make your fixed income stretch further. Many retirees are living on tight budgets or concerned about outliving their savings. In fact, 61% of adults over 50 are concerned they will not have enough money to support themselves in retirement. These tax breaks can welcome peace of mind.

But there’s also more to the equation than just dollars and cents. From the cost of living to the quality of life, myriad other factors come into play when choosing the ideal place to spend your golden years. And as we’ve seen, even the most tax-advantaged states have potential tradeoffs, from steeper sales and property taxes to potentially sparser public services.

Ultimately, the decision of whether to move to a tax-free state is a highly individual one that depends on your unique mix of financial, practical, and emotional considerations.

Remember—these are your glory days, and you’ve earned the right to spend them in a place that makes you feel not just solvent but truly satisfied; for more tools and resources to compare the tax policies and living costs in different states, check out the Retirement Living Cost of Living Calculator and the Kiplinger State-by-State Guide to Taxes on Retirees.