Personal Finance

The 5 Most Tax-Friendly States for Retirees

What are the best states to retire in? That depends on which factors matter most to you. But you're looking to minimize your taxes, then five specific states will inevitably find their way to the top of your list.

The top three

Wyoming, Alaska, and Nevada are three of the most attractive states in America when it comes to residents' tax burden. According to an analysis by WalletHub, these three states had the lowest combined state and local tax burdens in the United States.

The typical Wyoming resident pays $2,365 every year in state and local taxes. Alaska was second, with a combined tax bill of $2,791. And Nevada rounded out the top three with an estimated average tax burden of $3,370. These were markedly below the national average:

Rank State Average Annual State and Local Taxes Variation from National Average
1 Wyoming $2,365 -66%
2 Alaska $2,791 -66%
3 Nevada $3,370 -52%
4 Florida $3,648 -48%
5 South Dakota $3,766 -46%
6 Washington $3,823 -45%
7 Texas $5,193 -25%
8 Delaware $5,195 -25%
9 North Dakota $5,588 -20%
10 Colorado $5,674 -19%

Source: John Kiernan for WalletHub.com.

In the case of Wyoming and Alaska, both states can afford to give their residents a break because the states' outsized energy industries offset that forgone revenue.

Wyoming is the nation's leading coal producer by leaps and bounds, and it's second only to Texas in terms of total energy production. And Alaska generates so much income from its oil industry that it cuts each of its residents a check every year. In 2014, the payment amounted to $1,884 per person.

The fact that none of these three states charges an income tax is particularly appealing from the perspective of retirees. Not only does this mean residents' earnings will be insulated from state coffers, but it also means that Social Security benefits are similarly immune. That's important when one considers that, according to the Social Security Administration, 52% of married couples and 74% of unmarried people receive half or more of their income from their monthly benefit checks.

The final two

The final two leading tax-friendly states for retirees aren't as immediately obvious. I say that because both of them, unlike the previous three states, expect their citizens to pay income taxes. I'm referring here to Georgia and Arizona.

What sets these states apart from the pack, however, is that both of them exempt certain types of retirement-related income from taxation.

In Georgia, Social Security income isn't taxed at all. On top of that, the Peach State exempts up to $65,000 in retirement income per person per year for taxpayers 65 or older. By 2016, this exemption is slated to cover all passive income.

Arizona's tax treatment is similar, though slightly less generous. Although the Grand Canyon State levies an income tax, its rate is relatively low, ranging from about 2.6% to 4.5%. Furthermore, Social Security benefits and up to $2,500 worth of other retirement income are tax-exempt.

The net result is this: If you're looking for a state to retire in, and taxes are the single most important consideration, then you may end up calling one of these five states home in retirement.

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The article The 5 Most Tax-Friendly States for Retirees originally appeared on Fool.com.

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