Data & Research November 2, 2015

A Map Shows the Worst States for Taxes in Retirement

Kiplinger’s tax map shows the importance of location, location, location for retirees.
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The Green Mountain State (Vermont) is the No. 1 worst state for retirees, according to Kiplinger’s Personal Finance Tax Map. With a steep top income tax rate, taxes on most retirement income, as well as on up to 85% of Social Security benefits, Vermont retirees could be taxed the most.

In an effort to close the state’s $100 million budget gap, Vermont now limits deductions to $15,750 for single residents and $31,500 for married couples—which puts Vermont in the unenviable top spot on Kiplinger’s list of least tax-friendly states for retirees.

Local jurisdictions can add 1% to the state sales tax. Food for home consumption, clothing, and prescription and nonprescription drugs are exempt. But you’ll pay a 9% tax on prepared foods, restaurant meals and lodging, and 10% if you order a glass of wine or beer in a restaurant.

The median property tax on the state’s median home value of $218,300 is $3,727, the ninth-highest in the U.S., according to the Tax Foundation. Eligible Vermont residents can make a claim for a rebate of their school and municipal property taxes if their household income does not exceed a certain level. (Generally, household incomes of $109,000 or more do not receive an adjustment.) Vermont taxes estates that exceed $2.75 million at a flat rate of 16% on the amount greater than the threshold. Assets left to a surviving spouse are exempt.

NEXT: Tax-free greens fees in the least-terrible tax state for retirees.

In contrast, New Yorkers fork over an average 12.6% of their income in state and local taxes, according to the Tax Foundation, but retirees can still catch several breaks in the state ranked 10th worst on Kiplinger's map. The Empire State doesn’t tax Social Security benefits or public pensions. It also excludes up to $20,000 for private pensions, out-of-state government pensions, individual retirement accounts (IRAs) and distributions from employer-sponsored retirement plans.

No state sales tax on food, prescription and nonprescription drugs—but as life isn’t all food and medicine, New Yorkers also enjoy greens fees, health club memberships, and most arts and entertainment tickets free of state tax. Depending on where you shop, though, sales taxes on everything else can be steep. The average state and local combined sales tax rate is 8.48%, according to the Tax Foundation. The median property tax on the state's median home value of $277,600 is $4,559, the 11th-highest rate in the U.S.

While New York has an estate tax, a law that took effect last year will make it less onerous. For fiscal year 2014 to 2015, estates valued at $2,062,500 are subject to an estate tax with a top rate of 16%. The exemption will rise by $1,062,500 each April 1 until it reaches $5,250,000 in 2017. Starting January 1, 2019, it will be indexed to the federal exemption, which is $5.43 million for 2015.

The top 10 worst states for retirees in terms of taxes are:

  1. Vermont
  2. Connecticut
  3. Rhode Island
  4. Minneosta
  5. Oregon
  6. Montana
  7. California
  8. Nebraska
  9. New Jersey
  10. New York

A link to Kiplinger’s map is here.

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