The most tax-friendly states for retirees

Florida didn't even make the top 5.

Since saving for retirement has been a challenge for many Americans, it makes sense that some seniors may choose to retire in a state where they can lower their tax liabilities later in life.

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Americans in high-tax states, for example, tend to leave places like New York and California, headed for states with no income taxes. Many of these people tend to be wealthy, retired or preparing to retire.

That trend has accelerated since the passage of the Tax Cuts and Jobs Act, which capped state and local tax deductions at $10,000.

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Even President Trump and his family recently just changed their primary residence from New York to Palm Beach, Florida, a state that has no income tax.

Older Americans may begin thinking about taxes that will be levied on assets they intend to pass on, too, so inheritance and estate taxes may be a bigger focus.

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Kiplinger recently released its lists of most and least tax-friendly states for retirees, based on state and local tax burdens that would be imposed on a retired couple with an IRA, a private pension, Social Security, a $400,000 home and $10,000 in deductible medical expenses.

Here’s a look at the top 5 most tax-friendly states for retirees, as compiled by Kiplinger:

1. Wyoming

The most tax-friendly state for retirees was found to be Wyoming, which has no state income tax.

Overall, Kiplinger found its tax burdens on retirees to be the lowest out of all 50 states.

In addition to no income taxes, Wyoming levies no statewide estate or inheritance taxes.

The average state and local sales tax rate is about 5.32 percent, while a $400,000 home would incur an annual property tax bill of $2,540 – with the possibility of additional tax break for seniors.

2. Nevada

Like Wyoming, the second best state for retirees – Nevada – has no state income taxes, inheritance or estate taxes.

Property taxes on a $400,000 property would come out to around $2,771 per year.

Sales taxes are a bit higher – with an average combined state and local rate of 8.14 percent – though groceries are exempt.

3. Delaware

Taking the third spot, Delaware has no statewide sales tax, estate tax or inheritance tax.

For a $400,000 property, the average tax bill is $2,414 – the sixth lowest rate in the U.S.

It does have state income taxes, ranging from 2.2 percent to 6.6 percent. Residents aged 60 and over can exclude up to $12,500 of pension and other retirement income, and Social Security benefits are also exempt.

4. Alabama

Huntsville, Alabama, USA park and downtown cityscape at twilight.

Alabama, like its predecessors on the list, has neither an estate nor inheritance tax.

Property taxes are the second-lowest in the country – an individual with a $400,000 property will owe just $1,729 per year. Older residents are also eligible for additional property tax breaks that could exempt them entirely from state property taxes.

Income tax rates range from 2 percent on the first $500 of taxable income, to 4 percent on the next $5,000 of taxable income, to 5 percent on all taxable income above $6,000.

Sales taxes in Alabama, however, are relatively high. While the state rate is 4 percent, local governments are allowed to add an additional 7 percent. The average combined state and local sales tax rate is the fifth highest out of all 50 states – at 9.16 percent.

5. South Carolina

Part of the charm for seniors living in South Carolina – the fifth best state for retirees – are in its tax breaks. Social Security benefits are exempt and individuals aged 65 and older can exclude $10,000 worth of retirement income. Further, seniors are able to deduct $15,000 from other taxable income, or $30,000 for taxpayers filing jointly.

The average state and local sales tax rate is 7.46 percent, while state income tax rates range from 3 percent to 7 percent. The average property tax bill is about $2,404 per year for a $400,000 property. There is a homestead exemption for seniors, too.

South Carolina has no inheritance or estate tax.

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And the top 5 least tax-friendly states for retirees…

1. Nebraska

2. Connecticut

3. Kansas

4. Wisconsin

5. Minnesota