By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
While moving to no-income-tax states can provide immediate cash-flow relief, the total cost-of-living, including property and sales taxes, should be considered. The 'downsizing arbitrage' strategy proposed by Gemini has potential but comes with significant risks such as timing, sequence dependency, and potential policy reversals.
Risk: Timing risk in executing the downsizing arbitrage strategy and potential policy reversals in no-income-tax states.
Opportunity: Immediate cash-flow relief from moving to no-income-tax states, especially for those with high income tax burdens.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Where Retirees Can Avoid Paying State Taxes on Their Retirement Income
Giselle Cancio
5 min read
Key Takeaways
Forty-two states don't tax Social Security benefits, giving many retirees a break on at least one major source of income.
Some states also exempt pension income, retirement account withdrawals, or military retirement pay from state taxes.
Nine states have no broad individual income tax, though retirees may still face property, sales, or other state and local taxes.
After a lifetime of contributing to Social Security, building up a retirement plan, or earning a pension, you may be bracing for a big tax hit in retirement. But state taxes vary widely, and many retirees get a break: 42 states don't tax Social Security income, 37 don't tax most military retirement pay, and 16 exempt pension income from state taxes.
Nine states go even further by not imposing a broad individual income tax at all. That can make a meaningful difference in how much retirement income you get to keep, though property, sales, and other taxes still matter when deciding where to live.
6 States Offer Retirement-Income Tax Breaks
These six states generally impose an individual income tax but exempt Social Security, pension income, retirement account withdrawals, or some combination of the three.
Arkansas
Arkansas offers retirees a break by exempting up to $6,000 per year from public and private employer-sponsored pension plans and traditional IRA distributions received after the age of 59½ or because of death or disability. It also doesn't tax Social Security income or military retirement pay at all. Plus, Arkansas imposes no estate or inheritance tax, so your heirs won't face additional tax burdens.
Illinois
Illinois exempts pension income, 401(k) and IRA withdrawals, Social Security benefits, and military retirement pay from state taxes. However, Illinois does tax other investment earnings. The state also has estate and inheritance taxes.
Iowa
Iowa changed its tax laws in January 2023 to become more retiree-friendly. As a result, the state no longer taxes pension, annuity, or IRA income for residents over age 55.
On January 1, 2025, the state more broadly transitioned to a flat tax system with a rate of 3.8%. It also eliminated its inheritance tax.
Mississippi
Mississippi spares retirement plan distributions, pension income, annuities, Social Security income, and military retirement pay from state taxes. Early distributions from retirement plans generally don't qualify for exempt status. This state doesn't have an estate or inheritance tax, either.
Pennsylvania
Retirees in Pennsylvania benefit from a lack of state taxes on Social Security, pension income, and retirement plan distributions. However, Pennsylvania has a flat income tax rate.
Important
Pennsylvania offers a property tax/rent rebate program for older adults.
South Carolina
South Carolina doesn't tax Social Security income. In addition, all military retirement pay is exempt from state income taxes.
9 More States Have No State Income Tax At All
Another nine states don't impose any broad individual income tax, so retirement income is generally not subject to state income tax there.
Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington (taxes only capital gains of high earners)
Wyoming
These states can give retirees a significant tax break by not taxing most or all retirement income. But property, sales, and other state and local taxes can still affect the overall cost of living.
At What Age Do You Stop Paying Taxes on Your Pension?
In the U.S., there is no age you stop paying taxes on your pension as taxes are not determined by age. Most pensions will be subject to federal income tax and state income tax, depending on the state. Additionally, at age 73, you must start taking required minimum distributions from tax-deferred accounts.
How Can I Reduce Taxes in Retirement?
There are a few strategies you can incorporate to help reduce taxes in retirement. You should start by planning your withdrawals strategically. You should first withdraw from taxable accounts and then tax-deferred ones, like 401(k)s and IRAs. This allows tax-advantaged accounts to grow longer while keeping taxable income lower early on.
Keep in mind that required minimum distributions (RMDs) begin at 73, so converting some traditional IRA money to a Roth IRA beforehand can reduce future tax burdens because Roth IRAs are not subject to RMDs.
Consider delaying Social Security benefits till 70, as that will increase your benefits but also keep taxes lower early on. Donating to charities also reduces taxes and can be an option for you. Lastly, living in a tax-friendly state will reduce your taxes as will certain medical deductions.
How Is Social Security Taxed in Retirement?
Social Security can be taxed in retirement depending on your income. If your combined income, which includes Social Security benefits, nontaxable interest, and adjusted gross income, is above a certain threshold, you will be subject to income tax. For single filers, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxed. (For married filing jointly filers, it's $32,000 to $44,000.) For single filers, if your combined income is above $34,000, up to 85% of your benefits may be taxed. (For married filing jointly filers, it's if it's above $44,000.)
The Bottom Line
State taxes on retirement income vary widely, but several states make life easier for retirees by offering significant tax breaks on Social Security, 401(k) withdrawals, IRA distributions, and pensions.
If you live in one of these states—or one of the nine without a broad individual income tax—you may be able to keep more of your retirement income. While tax laws can change, it's important to consider these factors when deciding where to retire. But there's more to consider than just taxes when you decide where to retire, so consider speaking to a financial advisor to find the right plan for you.
Four leading AI models discuss this article
"Retirees must evaluate the total tax burden—specifically property and sales taxes—rather than focusing exclusively on income tax exemptions, which can be misleading indicators of actual retirement affordability."
The article frames state-level tax avoidance as a primary driver for retirement planning, but this is a classic 'tax tail wagging the investment dog' trap. While moving to a zero-income-tax state like Florida or Tennessee provides immediate cash-flow relief, retirees often overlook the 'hidden' tax burden: high sales and property taxes. For instance, Texas and Florida rely heavily on property taxes to fund municipalities, which can erode the gains from income tax exemptions. Investors should focus on total cost-of-living metrics rather than just the headline tax rate. A move to a low-tax state is only 'bullish' for net worth if the cost of housing and services doesn't offset the income tax savings.
The fiscal health of states like Illinois or Pennsylvania is precarious; moving to a zero-income-tax state is a rational hedge against future tax hikes in high-debt, high-tax jurisdictions.
"Tax arbitrage on state income is real but easily overwhelmed by property-tax inflation, cost-of-living creep, and healthcare volatility in tax-haven states—the article treats taxes as the dominant variable when they rarely are."
This article is a tax-planning primer, not investment news—it conflates tax *avoidance* with financial outcomes. The nine no-income-tax states (FL, TX, NV, WA, TN, AK, SD, WY, NH) do tax property, sales, and often have higher effective rates overall. Florida and Texas have surging property values and property taxes rising faster than income tax savings. The article omits that tax-friendly states often attract retirees, bidding up real estate and cost of living, eroding the tax advantage. It also ignores that state tax policy is secondary to sequence-of-returns risk, healthcare costs, and longevity—the real retirement killers. Finally, the article presents static law; Iowa's 2025 flat-tax shift and ongoing state revenue pressures suggest these breaks may tighten.
Moving to a no-income-tax state genuinely *does* preserve 5–10% of retirement income annually for many retirees, and that compounds over 20+ years—ignoring this is financially reckless for someone with $500k+ in liquid retirement assets.
"Total tax burden, not income tax status alone, drives retirement affordability; headline exemptions can be undermined by higher property, sales, and healthcare costs in these states."
While the article highlights that several states offer exemptions on Social Security and pensions and notes that nine states have no broad income tax, the real story isn’t merely which bucket of taxes is lower. The strongest risk is total cost of living: many of these tax-friendly states have higher property and sales taxes, higher health care costs, or more regressive structures that erode cash flow gains. It glosses over policy risk (tax-law changes, sunset provisions) and demographic realities (not all retirees spend the same way). In short, tax savings can be illusory if location cost-of-living isn’t accounted for.
Against my own neutral stance: for many retirees, the state tax savings from no-income-tax states can be material enough to outweigh modest cost-of-living differences, especially with substantial Social Security or pension income; the article understates the durability of these cash-flow benefits.
"Net tax savings in these states are frequently overstated once property and sales taxes are included."
The article spotlights nine no-income-tax states and six others exempting retirement income, which could steer retirees toward Florida, Texas, and Tennessee. This migration pattern may lift local housing demand and consumer spending in those markets while pressuring states like California and New York. Yet the piece glosses over how Florida and Texas property taxes often exceed national averages and how sales-tax burdens hit fixed-income households harder. Federal RMD rules and potential future state tax hikes remain unaddressed risks that could erode the advertised savings.
Many retirees downsize into rentals or lower-value homes, making income-tax relief the dominant factor and rendering property-tax offsets smaller than assumed.
"Downsizing to lower-value homes in no-income-tax states allows retirees to capture equity and eliminate income tax drag, effectively neutralizing the higher property tax rates."
Grok, your point about downsizing is the missing variable. If retirees shift from high-value real estate in high-tax states to smaller, lower-maintenance properties in no-income-tax states, the property tax 'trap' Claude and Gemini emphasize becomes a non-factor. We are ignoring the 'lifestyle arbitrage'—liquidating high-cost assets in the Northeast to capture equity while simultaneously eliminating the 5-8% state income tax drag. This shift is a powerful, dual-engine mechanism for portfolio longevity that current analysis overlooks.
"Downsizing arbitrage is real but depends on timing, market conditions, and health trajectory—variables the article and panel have treated as given."
Gemini's downsizing arbitrage is elegant but assumes execution risk nobody's quantified. Liquidating a $1.2M home in Connecticut to buy $600K in Florida works—until you factor in: (1) timing risk (sell into a downturn?), (2) lifestyle lock-in (downsizing is irreversible; what if health costs spike?), (3) sequence dependency (must happen early in retirement, not year 15). The dual-engine thesis collapses if housing markets desynchronize or if retirees underestimate healthcare's claim on fixed income. It's not wrong, but it's fragile.
"Downsizing arbitrage hinges on perfect timing and execution; without early sale and stable healthcare costs, the cash-flow gains can be wiped out."
Gemini's Downsizing arbitrage sounds compelling, but it presumes a perfect, early execution of a high-cost sale. In reality you face timing risk, transaction costs, capital gains taxes, moving expenses, and potential healthcare access changes. If the sale lags or health costs rise, the anticipated tax/save-off becomes a drag, not a cushion, and the 'dual-engine' of savings can rapidly erode. That is the risk to highlight.
"Residency change alone delivers tax relief without downsizing, exposing state policy reversal as the primary long-term risk."
Claude's sequence-dependency warning on downsizing overlooks a key portability factor: Social Security and pensions flow tax-free in no-income-tax states without any home sale required. Retirees can capture the 5-8% income-tax relief immediately via residency change alone, sidestepping housing market timing. The unmentioned risk is that states like Florida may eventually introduce income taxes if retiree-driven revenue shortfalls force policy reversals within the next decade.
While moving to no-income-tax states can provide immediate cash-flow relief, the total cost-of-living, including property and sales taxes, should be considered. The 'downsizing arbitrage' strategy proposed by Gemini has potential but comes with significant risks such as timing, sequence dependency, and potential policy reversals.
Immediate cash-flow relief from moving to no-income-tax states, especially for those with high income tax burdens.
Timing risk in executing the downsizing arbitrage strategy and potential policy reversals in no-income-tax states.